If you feel your credit score isn’t quite up to snuff, there are number of pretty simple and straightforward ways to improve it. After all, who doesn’t want a good credit score? It can save you thousands of dollars on all types of loans and credit cards annually. And even on car insurance!
How Credit Scoring Works
Though both Fico and VantageScore, the top two providers of consumers credit scores, use secret algorithms to come up with our credit scores, they also provide a lot of insight on their respective websites about how scoring works. Let’s look at Fico, the preeminent leader in the credit scoring space.
Payment History Paramount
If we look at how they score us, it’ll be that much easier to improve our credit scores. That said, one of the most important factors both companies use to come up with our credit scores is payment history. Fico assigns a whopping 35% of overall scoring to payment history. That means it’s imperative that you make on-time payments every time. If you do, your credit score will certainly never fall below average.
Amounts Owed Also Key
The amounts you owe on your credit accounts is the second most important credit scoring factor, accounting for 30% of your Fico score. In short, this means that the less you owe, the higher your credit score will be. And the smaller percentage of credit you utilize, the higher the credit score will be.
Let’s look at an example:
Available credit: $25,000
Used credit: $200
Credit utilization: 8%
In the scenario above, you’d have credit utilization of just 8%, making you a pretty low-risk borrower. If you were using $24,000 or your $25,000 aggregate credit limit, or 96%, you’d be a super high-risk borrower and would see your credit score fall as a result. Think of this way – would you rather lend someone money with little outstanding debt or someone with a ton of debt to their name? Creditors look at consumers in this light.
Credit History, Types of Credit, and New Credit
Fico also takes into account length of credit history, types of credit used, and new credit. Obviously, those with longer histories of supporting debt will have higher credit scores, so it takes time to establish truly excellent credit. Additionally, Fico wants to know that you can handle different types of credit, such as auto loans and mortgages, not just credit cards. Doing so demonstrates even more financial responsibility.
Finally, Fico looks at new credit. If you’ve got tons of new credit or applications for new credit, you’re looked at as a greater credit risk. Essentially, you’re in a weaker financial position when applying for credit. So now that you have a better idea as to how credit scoring works, you’ll be able to better understand how to improve your credit score. It’s not a mystery, just common sense.
Improve Your Credit History!
But do understand that it takes time and patience. A key component of credit score quality is time. Without time, you can’t really prove anything. If your dog behaves for one day, you won’t necessarily just believe that he or she is a good dog. They need to prove that their good behavior will stick over time.
They also need to show that they can behave in a variety of different situations where there may be temptation. To draw a parallel, a dog left alone in a home with an accessible garbage can may get into it. The same goes for a consumer with access to a huge credit line. If they prove that despite being tempted, they stay away from it, they will be rewarded.
But one day or one week isn’t enough. The proof only comes over time. This explains (to some degree) why there is a positive correlation between older age and higher credit scores. And also why you can’t really raise your credit score quickly unless you’ve got a serious error on your credit report.
Even if you do improve your credit score overnight, without years of solid history, you’ll lack the depth needed to exhibit a truly excellent credit score.
Tip: Don’t forget to factor in the appropriate credit score scale to see where you stand in comparison to other American consumers.