Guest post by Borrowell
You’ve probably heard of a credit score and know that it’s pretty important when it comes to your personal finances. But do you know exactly what you need to do to improve it?
If you need a bit of a refresher – we’ve got you covered! A credit score is a 3-digit number, typically between 300-900, that lets banks, lenders, and other financial institutions know how creditworthy you are. Having a good credit score can help you lock in lower interest rates on your mortgage, personal loans, and insurance. Having a good score can make life a little easier because it allows you to access the best rates and financial products and services.
In a recent study, we found a connection between the frequency of credit monitoring, credit score improvement, and good credit behaviour in general. If you haven’t checked your free credit score and credit report, you can do so in less than three minutes through Borrowell. Here are 5 things you can start doing today to start improving your credit score.
1. Pay off any outstanding credit card bills
According to Equifax’s calculations and our data, payment history is by far the most important factor that makes up your credit score. Payment history accounts for 35% of your score – more than any other category.
Late payments are assessed based on these three things:
- How recent the late payments are
- How severe they are (how much money you owe)
- How frequently you’re late on payments
The typical timeline for late payments goes as follows: 30 days, 60 days, 90 days, 120 days, 150 days. At this point, it will be categorized as “uncollectible” and could be sent to collections. It’s important to keep up with payments and be aware that you’re late because just one missed payment can impact your credit score. Chronic missed payments can lead to higher interest rates, late fees, and penalties, reduced credit card limits, and even court judgments.
Interestingly enough, our study found that monitoring your credit score was often related to lower rates of delinquencies and late payments over time. So if you’re looking to improve your credit score, paying off any existing bills and setting up automatic payments for household bills is a great place to start.
Here are all of the factors that make up a credit score.
2. Use less credit
Credit utilization is a lesser-known factor but it still makes up a whopping 30% of your credit score. Your credit utilization ratio is the amount of credit used out of the total amount of credit available to you.
You can calculate your own ratio by adding up the credit you’ve used and dividing it by your total credit limit. Banks and lenders like to see this number below 30% and view a low utilization ratio as responsible credit use.
If we’re taking you back to high school math class, here’s an example to make it a little clearer. If your credit card limit is $5,000 and your balance is $1,250, your utilization is at 25%. According to the study, members who improved their credit scores over time have learned to manage their credit utilization. So, if you’re looking to improve your credit score – try to keep your credit utilization under 30%.
3. Increase your credit limit
We now know that credit utilization is important when it comes to improving your credit score. A simple trick to help you improve your credit score is to increase the credit limit on your credit card. While this may sound counterproductive, it’s actually a very helpful trick to improve your credit utilization ratio, since you’re giving yourself more credit to work with.
However, if you find increasing your credit limit a little too tempting – then focus more on spending less in general and not as much on your utilization.
4. Start monitoring your credit score
As we mentioned earlier, we found a significant correlation between credit monitoring and credit improvement. To measure engagement in credit monitoring, we calculated the percent of logins upon credit score refresh for each member. Next, to examine the relationship between credit monitoring and credit score changes, we calculated the difference between a member’s first credit score upon signing up for Borrowell and their most recent credit score.
Across the board, we found a positive relationship between the frequency of credit monitoring and credit score increases. For our most engaged members (those who check their credit scores the most frequently), we found that their credit scores increased by an average of 18 points. If you’re serious about credit score improvement, you can start by monitoring your free credit score.
5. Think it over before opening new credit accounts
Another important factor that makes up your credit score is new credit – or your credit inquiries, which make up 10% of your credit score. There are two types of credit inquiries: soft and hard inquiries.
Soft inquiries occur when you check your credit yourself. Soft inquiries do not affect your credit score, no matter how many times it’s checked. Soft credit checks can include:
- Pre-approved credit card offers
- Pre-approved loan offers (i.e. line of credit, mortgage)
- Employer background check
- Getting your free credit score from Borrowell
Hard inquiries, on the other hand, happen when a potential lender checks your credit score and report when making the decision about whether to lend to you or not. Hard credit inquiries provide lenders full access to your entire credit history and will slightly lower your credit score. A record of the inquiry will stay on your credit report for two years, where it’s visible to other creditors when they make a hard pull. Companies that make hard credit inquiries need your consent before they make an inquiry. Hard inquiries can include:
- Credit card applications
- Personal loan applications
- Apartment rental applications
- Cell phone contracts
As you can see, hard inquiries can affect your credit score, which is why you should be thoughtful when seeking new credit. As long as it’s not something you’re doing constantly, this won’t affect your score in the long term. However, if you plan on applying for a large amount of credit in the future, it’s wise not to take on any new credit in the months leading up to your purchase.
The bottom line
Credit scores may seem confusing, but we hope this article has demonstrated that they really don’t need to be! We hope you feel empowered with these 5 ways to improve your credit score. Check your free credit score with Borrowell today (this doesn’t affect your credit score).
Borrowell helps people make great decisions about credit. With its free credit score and report monitoring, automated credit coaching tools and AI-driven financial product recommendations, Borrowell empowers consumers to improve their financial well-being and be the hero of their credit. Get your free credit score today!