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I get asked a lot about what actions actually impact your credit score. We talked about the habits of people with 800+ credit scores last month, so this month I wanted to shift gears and talk about what the actual factors are that make up your credit score. Once you understand these, you'll have a much clearer picture about how to get your score up, and keep it there! If you feel like you want to take a quick step back, I've also written aboutwhat exactly is your credit score, who is calculating it, and what it's used for herewhich can give you an even fuller view of your credit score.
The credit score ranges can change a little from year to year so use this list of credit score ranges as general rule of thumb:
- Anything below 550 is generally considered a very poor credit score
- 550-650 is considered a poor credit score
- 650-700 is considered a fair credit score
- 700-750 is considered a good credit score
- 750-850 is considered an excellent credit score
This makes up the largest percent of your credit score at roughly 35 percent. It essentially is looking to see if you make payments on time. As with everything related to calculating your credit score, it's weighted heavier for more recent behavior over older behavior; but it still looks back as far as seven years for late or missed payments. Another weighted factor in this area is how late you were with payments.
A payment made within 30 days isn't going to impact you as much as if you paid 60 or 90 days late. In the same line of thinking, things sent to collections are also going to be weighted heavier. And of course, other major red flags that get weighted into this area include: any bankruptcies, foreclosures, wage garnishments,charge offs, debt settlements, or liens against you. If you have any of these, I'd personally recommend connecting with the professionals at Lexington Law firm to help you navigate them and bringing your score up. You can get a free credit report consultation with them here. These are the types of factors that will come back around an impact your life in unexpected ways. One of the simplest ways to get your credit score up and keep it there is by making consistent payments on time.
Your credit utilization ratio is the amount of outstanding debt you have, compared to your actual credit limit for your credit cards. Generally, you'll want to keep this at or below 30 percent. Meaning if you have a $10,000 credit limit, you'll want to only be using $3,000 or less. This is calculated by individual card across all of your accounts usually. Meaning if you have five credit cards with their credit limits totaling $30,000, you can't max one of the cards out at $3,000 and be considered okay. Instead, you need to keep each of the five credit cards below that 30% utilization ratio.
A note on debt: Even if you pay off your credit card bills every month and have the money in the bank to pay for the items via debit or cash, whenever you charge something to credit it's viewed as an outstanding debt. So while someone may say, “I have no debt,” anytime they swipe their card, even when they have the money to pay it off that day, it's still viewed as outstanding debt when calculating a credit score. This is actually a huge win!
If you struggle with comfortably using credit cards I want you to go back and re-read that. It essentially shows you that debt isn't something to be feared, but rather used as a tool if you're spending within your means! This factor makes up roughly 30% of your credit score so it's a big one to understand! The key take away here really is: only charge what you can pay off. Don't max out your cards!
[RELATED] See how you do on Lexington Law firms quiz: What Affects Credit Utilization?
Other things that get weighted in this area, though not as much as your credit utilization ratio, are other outstanding debts. That includes more fixed things like your mortgage payment, auto loans, and anything else you may have. More on those types of debts in the next section though!
The good thing about the other types of loans I just mentioned (mortgage, auto, installment), is that your credit score is also (minimally) weighted by the various types of credit you have. So if you have a mortgage or student loans as well as revolving credit (credit cards) it gives you a little bit of a boost. I want to stress, this is only worth about 10% of your score. You can have an excellent or good credit score with only credit cards. However, if you have student loans, a mortgage, auto loans, or any other type of installment loan this is good news since it gives you a little bit of a boost.
The ideas here, is that lenders want to see that you can manage various types of credit responsibly. Again, I wouldn't run out and open up any of the latter described accounts to get the little boost, you can have an excellent credit score with just using a credit card responsibly. However, if you only have student loans, then opening up a credit card would probably help your score go up (both since it's a varying the type of credit available to you, and because you're going to give yourself more opportunities to prove yourself on the other areas that make up your credit score we're talking about in this post).
This makes up roughly 15% of your credit score. It shows lenders that you have a history of managing credit (and the other factors show whether or not you do it responsibly). When calculating your credit score, they're factoring in the age of your oldest account and the average age of all your accounts. This is why it's important to keep your credit card accounts open, even if you don't use the credit card anymore.
Although, I would recommend using your oldest card at least once a month or every other month to keep it active. When you haven't used a credit card for a really long time it can get marked as “inactive” and can stop factoring into your credit score. So if you do get the urge to stop using a credit card or close out a bunch of accounts, be sure to look at how old they are and what their credit limit is because either of those factors could negatively impact your score.
Roughly 10% of your credit score is based on your recent lines of credit, including the hard inquiries that don't necessarily become lines of credit. Essentially, whenever you apply for a new line of credit, the lender typically does a hard inquiry where they check your credit score and history to determine how credit-worthy you actually are. Again, this is only when a potential lender pulls your information, if you pull your own information that's treated as a soft inquiry and doesn't impact you anymore.
Hard inquiries cause your score to drop a little. The idea here is to deter someone from going out and opening a ton of credit lines in a short period of time if they're experiencing cash flow problems. It's kind of like a built in checks-and-balances system to ensure you don't go from responsible credit-worthy person to high risk in loads of debt in the blink of an eye.
Generally, these hard inquiries or new lines of credit will only impact your score a little bit, and age off quickly. Depending on which credit score you're pulling, it only will continue getting factored in for a year or two – again most recent activity is weighted heaviest. So the month you have a hard inquiry will be the greatest drop, then you'll see a slow and steady incline as time goes by.
You can check out even more lesser known factors that impact your credit score on Lexington Law Firms blog here.
Remember, when anyone is looking at your credit score they are simply trying to figure out how likely you are to pay them back and on time. Having a good credit score comes down to consistently making payments on time and living within your means. If you've struggled with your credit in that past, that's okay! Your credit score is more weighted based off of your recent activity versus your older habits. Reach out to the professionals at Lexington Law Firm for your free credit report consultation to help you navigate the best approach to repairing your credit score.
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