What are Credit Scores and How to Improve?
The topic of credit scores is highly debated. Some people say that credit scores don’t matter and that there are other ways to secure financing with either low scores or no credit history. But I’m here to say they do matter. And they are one of the best tools that a person has to have some control over their financial future.
Credit scores are the main way that banks and other lending institutions decide whether or not they’re comfortable with lending you money for things like mortgages, car loans, and other credit lines. Beyond securing more lines of credit, credit scores are other important reasons too.
Employment: Employers, especially those in the finance industry, often run credit checks on candidates not only for security purposes, but also to look at how the applicant handles responsibilities.
Better loan terms: Broadly speaking, lenders are more likely to offer credit or loans at lower interest rates to individuals who are more likely to repay. So what that means is that the higher the credit score, the less you’ll pay in interest over time.
Insurance: Insurers often look at credit scores to determine whether to offer coverage and what the premiums
Credit scores don’t have to be shrouded in mystery. Here’s an easy breakdown of what goes into them and how, by knowing this information, you can make small changes to your use of debt.
Payment History (35%): This part of the score takes into account your track record of making payments. Do you pay them all on time and in full? Or have you had late or missed payments that have gone into collections?
Credit Utilization (30%): This is the amount of credit you use versus what is available to you. So if you have a $10,000 line of credit and currently have a balance of $5,000 that means you’re utilizing 50% of the credit available to you. Generally speaking, you want to keep your credit utilization below 30%.
Credit History (15%): How old is your oldest account? From a credit score perspective, the older the account is the better.
Public Records (10%): This is information about past bankruptcies or accounts that have gone into collections.
Hard Inquiries (10%): When a lender or credit card provider checks a credit report to make a lending decision.
When it comes to making changes to improve your credit score, this is a marathon not a sprint. It can take years to get a bad score to an excellent one. However, there are small changes that you can make which can slowly improve to your credit. Here are my top 3 tips:
Pay small bills on credit cards and pay them off in full every month: This helps build up a credit history and shows lenders that you are a reliable person and they can trust you will repay your bills.
Keep unused credit cards open: Unless there is a reason to close your credit card like a high annual fee, keeping a card open is a great way to establish your credit history. If you do need to close your credit card, don’t try to open a new one immediately, as that can do a double dent in your score.
Pay off cards with the highest balance: Credit utilization is one of the most important factors going into the overall calculation of your credit scores. There’s two reasons why it’s never a good idea to hold high balances: 1) You will pay more in interest the higher the balance and the longer you hold that balance on the card 2) The higher the balance, the more of the credit you will be utilizing that is available to you.
Danielle Holden
Family Office Advisor
Breakaway Family Office can help you come up with a strategy to improve your credit score through gradual changes. Email me at dholden@breakawayba.com to learn more.