Mortgages, car loans, basically all of your borrowing power is hugely determined by your credit score. It can have a major impact on any interest rate given to you on credit cards, loans, etc. But what really is it? In this article, we will dive into it and how you can boost your credit score!
What Is A Credit Score?
Well, the best place to start would be to discuss what a credit score even is. Your credit score is made up of a three-digit number. Where that three-digit number lands on a scale of potential scores is what provides lender information about how risky it is to loan you money. The highest possible score you can achieve is 850 and the lowest possible score is 300. The higher your score, the less risky you are a borrower and the more likely you can achieve a lower interest rate on any money loaned to you.
However, most lenders use certain buckets of scores to determine someone’s creditworthiness (how risky you are as a borrower). See below for what your credit score means from a lender’s perspective:
- 300 – 579: Very poor credit
- 580 – 669: Fair credit
- 670 – 739: Good credit
- 740 – 799: Very good credit
- 800 – 850: Exceptional credit
This is based on Experian data, which brings me to my next point. There are three major credit bureaus that all track consumers’ credit history. These bureaus compile this data to give you detailed reports on your habits and where your credit may need improvement. The three credit bureaus are:
- FICO (Fair Isaac Corporation)
- Experian
- Equifax
FICO mainly just gives you a score based on your debt and your ability to pay on time while Experian and Equifax collect a lot more details to give you a comprehensive credit report. These other details may include the length of time that debt has been taken out, how many credit cards you have, etc.
According to the Fair Credit Reporting Act, you as the consumer are entitled to one free report from each of the above three bureaus every single year. This is something you definitely need to start taking advantage of as soon as possible.
How To Find Your Credit Score
There are a lot of different ways to obtain your credit score on more than once a year basis. Credit Karma and Credit Sesame both pull soft inquiries of your credit score so you can understand it better. A soft inquiry does not affect your credit score. This is what an employer will do when they’re conducting a background check on you.
I get my credit score from Mint. I have the app and every so often I get notifications that my credit score has been updated. Additionally, I also get notifications when someone is pulling my credit history which is very useful.
On the flip side, a hard inquiry will affect your credit score. These happen when the lender is looking into granting you a loan, mortgage, etc. but hasn’t agreed to it yet. These do stay on your credit report for two years and may drop your score a couple of points but nothing major in the grand scheme of things.
Biggest Credit Score Factors
According to Experian.com these are the most important factors that will adjust your FICO score.
- Less influential (10% of credit score): History of inquiries against your credit report
- Less influential (10% of credit score): New credit and credit mix (types of accounts you hold)
- Moderately influencer (15% of credit score): Length of credit history
- Highly influential (30% of credit score): Total debt and amounts owed
- Most influential (35% of credit score): Payment history on loans and credit cards
Knowing these factors can really help you see what the best path forward is for increasing your credit score. That said, here are some major steps that need to be taken to really boost that score.
Step #1. Check Your Credit Report for Mistakes
Make sure you are reading your entire credit report in detail. You want to catch any mistakes that might be included in your credit history. It is not uncommon for there to be mistakes. You should be checking it for mistakes at least yearly.
You can get a free credit report every single year due to the Fair Credit Reporting Act so make sure to get one from each of the bureaus and read it carefully. If you do find a mistake, you have to report it to the bureau that made it.
#2. Autopay Right Away
Looking at the biggest credit score factors listed above (5 in total), you will want to start with what has the highest impact on your credit which are #4 and #5. That would mean payment history and total debt outstanding. The easiest way to improve each of these would be to pay down your debt in a timely manner.
Additionally, if you have some spare cash you’re looking to invest, if you invest it towards paying down some debt then you will definitely be increasing your credit score. One thing to make sure to ask for is if you are paying something off in full, ask the creditors if they can remove the negative hit to your credit report. You would be surprised how often they can help you with that.
For anything with a regular monthly payment, make sure you set up autopay so the minimum balance is at least paid each month. This will stop you from receiving any late charges and points taken from your credit score.
#3. Do Not Cancel Cards
Your length of credit history also matters. This means you should not be closing out your oldest credit card even if you never have used it since high school. That is a dramatic statement of course and if it makes your life simpler to close it out, then go for it however my guess is that since you are reading this article you are willing to do whatever it takes to get your credit score up.
Therefore I would recommend keeping all credit cards open.
#4. Phone A Friend
Does your friend or a family member have a great credit score? Did you know that you can benefit from them being such a good two shoes? That’s right. If you have them add you as an authorized user then your credit score will rise up. Plus, with every on-time payments, your credit score will also be boosted.
You don’t need to use the card even, the card can be opened up but never give n to you. All you need is your name on their account.
#5. The Sky Is The Limit
Talk to your credit card company about having your credit limit increased. If you always pay on time and your credit score is on the rise, then you will likely be able to increase your maximum spend amount. This will also seriously help you increase your credit score since you are improving your credit utilization.
#6. Say It With Me
You do not need to carry a monthly balance to build credit. This is one of the biggest myths that American’s believe. Pay your credit cards off as soon as you want, never pay them late but whatever you do make sure you do not carry over your balance to “build credit” because that is the opposite of what is happening.
Final Thoughts
Two words: Purchasing Power. You want to be able to buy what you want when you want and how you want right? Well, for those of us who do not have a net worth of over $20 million, this might sound ridiculous but honestly having a solid credit score can really enable you to borrow money to buy and do the things you want.
Of course, always borrow wisely and don’t just take money because you can.
Do you know your credit score? How do you track it?
For more on credit scores and how to boost them, check out these videos:
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Gina DiMasi
Gina DiMasi is an organizational finance whiz. Gina is an avid investor, educator and aficionado of bitcoin and other modern investments. In addition to being an all around nice person, Gina has a degree in personal finance studies from Framingham State University. When she's not running numbers or blogging up a storm, Gina actively volunteers with Habitat for Humanity.
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