Many people see improving their credit score as an impossible task. The reality is you don’t need to accept unfavorable credit and high interest rates! There are simple things you can start doing today to improve your score.
What Affects Your Score?
To understand how to raise your score, we first have to define what a credit score is, as well as identify the five factors affecting your credit score and the percentage they contribute to your overall score. A credit score is a three-digit number from 350 to 850 that financial institutions can look at and know, at a glance, your capacity to repay a loan. The five factors that make up this number are below:
- Payment History (35%)
- Credit Utilization (30%)
- Length of Credit History (15%)
- New Credit (10%)
- Mix of Credit in Use (10%)
You may have already noticed that the first two score factors encompass 65% of your credit score. This is where the strategy comes in! By focusing on these two factors, you will likely see an increase in your credit score. We’re going to discuss payment history and credit utilization below in more detail, but if you’d like to learn about each of the score factors and what they mean, check out our video below:
The most heavily weighed score factor, payment history, is a record of your payments and how you have (or haven’t!) paid them. Payment history encompasses any kind of loan payment you’ve made, which includes student loans, mortgages, vehicle loans and credit cards.
Missing a payment can have a very negative impact on your score to the tune of 60 to 100 points, and it may take up to 12 months for the effects of the missed payment to no longer reflect in your score. Payment history can also include other events that don’t necessarily have to do with payments, such as lawsuits and bankruptcies.
Credit utilization looks at how much credit you are using in your revolving lines of credit. Revolving lines of credit are those that allow you to borrow money up to a set limit until you pay it back. The most popular lines of credit are credit cards, but they also include personal and home equity lines of credit.
Keeping the amount of credit you’re using low will increase your score, and it’s widely recommended that you don’t use more than 30% of your credit. Let’s say your credit card limit is $1,000. This means you should keep your credit utilization to $300. This doesn’t mean you can’t make larger purchases, just that you should try to make your amount owed as low as possible.
The previous example is very simplified, as you might have multiple lines of credit. In that case, you’d need to add all of those up. Let’s say you have a second credit card and a personal line of credit with limits of $3,000 and $5,000. This would mean your overall credit limit is $9,000.
For this example, assume you currently owe $4,128 across all of your lines of credit. Dividing $4,128 by $9,000 gives us a credit utilization ratio of 45.8%. This is 15.8% more than recommended and is ultimately going to negatively influence your score. Why is that?
Simple! Because a low credit utilization ratio is usually a sign that you are appropriately managing your finances. Moreover, it’s an indicator that you aren’t overspending.
Improving Your Score
So how can we use this information? Since these two factors make up 65% of your score, making a few changes in your financial life can improve your score. Keeping your credit utilization at a maximum of 30% (or lower) and always making sure to pay on time will have a positive impact on your score.
For more information on credit scores as well as a free credit report analysis, we’re here to help! You’re also able to access your FICO® credit score for free through online and mobile banking.
Florida Credit Union is a full-service financial institution. Founded in 1954 as the Alachua County Teachers’ Credit Union, FCU now services over 130,000 members in 48 counties throughout North and Central Florida. For more information on the services we provide, visit FLCU.org or call us at 1-800-284-1144.