It pays to have good credit. Good credit allows you to be pre-approved for loans, borrow larger sums of money, and pay lower interest rates. There are 6 different factors that affect your credit score. We’ll talk about each in order of importance.
Keep reading if you too want to establish excellent credit.
1. Pay your bills on time to increase credit score
This is 35% of your credit score, the largest chunk, so make sure you do it. If you’re forgetful or are a bit disorganized, set up auto-pay on your accounts. My car insurance provider requires I use auto-pay. My student loan provider lowered my interest rates for signing up for auto-pay. This allows me to pay them off sooner. If you have student loans, it would be wise to check with your loan provider to see if they offer something similar.
When it comes to credit cards, always pay the full balance before the bill becomes due. This will help you avoid those high-interest rates. The logic here is simple. If you can’t afford to pay off that $1000 TV you bought last month, you definitely won’t be able to pay it off with interest down the line.
2. Don’t use a large percentage of your available credit
This is worth 30% of your credit score. Some people suggest not to use more than 30% of your available credit, while others say that’s a myth. I suggest you stay under 30%.
3. The older your accounts the better
This is 15% of your credit score. Lenders are more impressed by someone who pays their debts on-time for 3 years straight, compared to someone who’s only done it for 3 months.
It’s about building up a track record.
To help improve your average, try not to close older accounts or open up a bunch of new ones.
4. The number of credit cards and loans you have matter
This is about 10% of your credit score. Lenders like to see that you have open lines of credit and that you’re paying down different debts. There’s a bit of pattern recognition here. If a person has 2 credit cards and a handful of outstanding loans that they pay faithfully, lenders see them as safe. I’m not saying you need 7 accounts; I’m speaking hypothetically.
5. Don’t go crazy with the number of credit checks
This is about 10% of your credit score. A credit check is also known as an inquiry or pull. There are two types of pulls: hard and soft.
A hard pull slightly affects your credit. Hard pulls happen when lenders run your credit. Your credit report helps them decide whether or not to loan you money. If you’re concerned with the number of times you’ve already had this happen, don’t worry. The hard pull will only stay on your credit report for about 2 years.
A soft pull doesn’t affect your credit. Soft pulls include you checking your credit or a company checking your credit as part of a background check for a job. Yes, you read that right. Companies sometimes review your credit score. In their eyes, a low score may signal that you’re irresponsible. This is yet another reason to keep your finances in order.
6. Don’t go into bankruptcy or let your debts go into collections
If either happens, expect to take a huge hit to your credit score.
If you’re one of the 8 million borrowers defaulting on their student loans, listen up. It takes about 7 years to recover from bankruptcy and it doesn’t always get you off the hook for your student loans.
According to the U.S. Department of Education, you have to go to court and make a case about why you can’t pay back your loans. The twist is that your lender could show up and challenge you on that. Do yourself a favor and get your debts, especially your student loans under control.
Be sure to check your credit report at least once a year. The government allows you to download one free credit report a year. You can read more about that here.
If you see that any of your debts have gone into collections, get them paid off. Either pay them in full or negotiate a settlement with the debt collector.
It’s also important to remove any inaccurate information you see on your credit report. If you paid off a debt and discover months later that it still shows in collections, file a dispute. If you have debts that you know nothing about, file a dispute. It’s possible you’ve been the victim of identity theft.
Pay your bills on time. Avoid going into collections. Avoid going bankrupt. Doing these things over a long period of time will help you establish excellent credit just like us!