How to Level Up Your Credit Score
Your credit score is a number that creditors use to help determine your behavior, including how likely you are to make payments on a loan. The higher the score, the easier it will be for you to get a loan, rent an apartment, or get a better insurance rate. People with higher credit scores are also more likely to get lower interest rates on mortgages and car loans, and to get approved for higher credit limits. In general, having a high credit score lowers financial hurdles, so making sure it’s as high as possible is advantageous!
Getting a high-score on your credit is achievable with just a few good habits, but let’s look at the breakdown of what actually goes into the calculation of your credit score.
The FICO model is based on “score ingredients”, which comprise of five primary categories. Some models calculate these slightly differently, but in broad terms, the ingredients that make up your credit score is the same. Listed below are those factors, and some dos and don’ts:
Payment History (35%)
✓ Paying your debts in a timely manner
X Letting your debts build up
Amount of Debt (30%)
✓ Using less than 30% of your available credit
X Maxing out your lines of credit
Length of Credit History (15%)
✓ Having a long credit history
X Having a short credit history
Amount of New Credit (10%)
✓ Sparingly opening up new lines of credit
X Frequently opening up new lines of credit
Credit Mix (10%)
✓ Having a variety of different types of credit accounts
X Using less types of credit
As we can see, two-thirds of your credit score is determined by how much debt you have, and how efficiently you pay it off. To keep your payment history positive, you need to pay off more than just the minimum balance. Your payment history is calculated by how frequently you pay off the statement balance, not the minimum. So, having a rolling credit card balance from month to month is a behavior that should be avoided as it can negatively affect your credit score.
The ‘amount of debt’ metric is based off your credit utilization ratio. Your credit utilization ratio is calculated by taking the statement balance for a card and dividing that by your credit limit. For example, having a $1,000 statement balance on a card with a $10,000 limit would result in a credit utilization ratio of 10%. A lower credit utilization ratio will help boost your credit score, with a sub 10% credit utilization ratio being the best, but anything under 30% is generally fine. Occasionally using your full line won’t tank your credit score, but your score will start to drop if this happens frequently.
The other three categories make up only a third of your credit score, and they’re relatively self-explanatory. The longer you have credit for, the better your credit score will be. Similarly, having a greater variety of credit types (like having a credit card, a car loan, and a mortgage simultaneously) will increase your score as it shows that you’re capable of juggling multiple different lines of credit at the same time. It’s good to have multiple lines of credit, but keep in mind if you’re constantly opening up new lines, it can lower your credit score. This shouldn’t deter you from getting a loan for your car, but if you’re opening up your third credit card in a year, you’ll start to notice a dip in your score.
If you’re wondering how to check your credit score, you can make a free inquiry annually through sites like Experian. Your credit card or bank may also provide you with your credit score, so check there too.
If you have questions about credit score, budgeting or finances, give one of our advisors a call! Email us at ShepFinTeam@Shepherdfin.com or call us at 844.975.4015. We look forward to hearing from you!