5 Essential Tips to Improve Your Credit Score

You’re credit score is a 3 digit number designed to represent your credit risk, or the likelihood you will pay your bills on time. The higher your score the more likely you’ll be approved for loans with more favourable interest rates.

How is your credit score calculated? Your score is based on a scoring model that factors in your payment history, the amount of credit used vs your total available credit (amounts owed), the type of credit accounts in your name (credit mix), the length of your credit history, and the number of recent requests for credit you’ve made (new credit).

These 5 factors in determining your credit score can be divided into a chart. To maximize your score you need to understand what each section represents, and how to prioritize them appropriately.

1.Payment History: This can impact your score by up to 35%. It shows how likely you are to pay back your loans. It provides data on missed or late payments, any bankruptcy filings or debt collections. The key to having a solid payment history is to simply pay your bills on time, every month, without fail. Try to avoid underpaying as well. When paying your credit card bill you have the option of paying the bill in full, or making a minimum payment. It is obviously better to pay something rather than missing the bill completely, but just making the minimum payment will drop your credit score.

2.Amounts Owed: This can impact your score by up to 30%. It is basically a formula of how much your credit limit is vs how much credit you spend each month. This is also known as your credit utilization rate or debt to credit ratio. Creditors like to see a utilization rate of 30% or lower. For example; if you have a credit card with a $1000 limit and you spend $300 during the month, you’re spending 30% of your limit. Any higher and your credit score will start to drop due to a high utilization rate. To combat this it is recommended to raise your credit limit to $5000 or a high enough number (based on your spending habits) so your credit utilization rate stays below 30%. Ideally, you want to keep your credit utilization rate below 10% to maximize your credit score. The easiest trick to doing this is to simply raise your credit limit while remaining disciplined enough to not use your credit card often.

3. Credit History: This can impact your score by up to 15%. This is the age of your credit history. How long you’ve had your credit card active. Naturally, the older you are correlates with how long you’ve had a credit card, and if you’ve kept your card in good standing you will raise your credit score. Anything less than 2 years is considered a short credit history. Lenders are trying to gauge how well you manage your credit accounts, and can get a more accurate assessment with a bigger sample size. My advice here is to use your credit card consistently, and to not close any credit cards because you would be closing your history.

4. Types of Credit Used: This can impact your score by up to 10%. Lenders and creditors use this factor to measure your ability to manage multiple debts, and different credit types. There are 2 different types of loans; the first is called installment debt. This debt is car loans, student loans, and mortgages. These are fixed loans that are paid consistently every month. The second type of loan is called revolving accounts which is credit card debt and lines of credit. This debt is based on user rate and will be a different payment each month. Lenders want to see different kinds of debt (mortgage, credit card, car loan) in your credit history because this is how they judge your ability to juggle multiple loans while still being able to pay your bills on time. To keep your credit score high you’ll want to hold off paying your car loans and student loans immediately. This may sound like poor advice, but in the long run it benefits you to keep your money in your bank account and to just pay off your loans slow and steady.

5. New Credit: This can impact your score by up to 10%. Each time you apply for a new credit card, the creditor will do a hard inquiry into your credit history to see if you qualify. Each application will reduce your credit score by 5 points in the short term, but your score will rebound a few months later. The more hard inquiries you make in a short period of time, the more negatively your score will be impacted because lenders view this as potentially taking on more debt than you can handle. To maximize your credit score all you need to do is be careful with how many credit cards you open in a short period of time, or to be careful how often you’re trying to open a personal line of credit account.

My credit score is currently in the 800s, but last year in a 6 month span my score dropped from 854 to 780 because I took on way too much debt. My monthly bills amounted close to $5500. This led me to paying the minimum monthly payment on my credit card. I didn’t realize at the time how much this would impact my score but it was drastic. I improved by credit score by getting a 3rd stream of income. Just by paying my credit card in full for 2 months in a row my score jumped up by 22 points. I hope this post helps all my beloved readers attain credit scores of 800 plus.