Being an adult means accepting responsibility for your finances. Though you may have grown up with parents who were able to provide for you with a home, food, and other needs, at some point you had to start making your own decisions. Learning how to handle and save money is an important skill.
One concept that plays a major role in your financial outlook is your credit score. This number determines what kinds of loans you can receive, what interest rates are possible, and even what type of housing you can gain access to. It’s safe to say that building up your credit score is one of the better ways to improve your financial status.
But what exactly affects your credit score? What leads to someone having a 750+ score versus a 500? Let’s take a look at some of the major factors that will affect your credit score so you can start strategizing about how to improve that number.
The most important factor that affects your credit score the most is payment history. Do you have a history of making payments that are on time and the full amount? This is why it is so important to pay all your bills, mortgage payments, credit card statements, and other monthly expenses on time. Every time you make a late payment or pay an amount that does not equal the total cost, your credit score can take a hit, setting you back on your journey toward great credit. If you don’t have enough money in your account to cover an upcoming payment, you could consider obtaining a cash advance from a bank to prevent a late payment penalty to your credit score.
How often you rely on non-cash methods to make your payments is another factor that will affect your credit score. When you have a credit card, that credit comes with a revolving spending limit, say $5,000. Now let’s say that you typically spend $900 each month before paying your bill. To calculate your revolving utilization, simply divide the amount of credit used by the total revolving limit and then multiply by 100 to get your percentage. In this case, your revolving utilization would be 18%. The consensus is that keeping revolving utilization below 20-25% is the best way to keep a good credit score. A higher number reflects the fact that you rely on credit to make purchases often, which is considered risky by credit card companies. Try to keep this percentage as low as possible so that your credit score can continue to increase.
Length of Credit
Here is another factor that affects your credit score and is normally beyond your control. You won’t even have a credit score until you open your first credit account, like getting a credit card or an auto loan for the first time. For that reason, teenagers and young adults typically have poor credit scores to start because their length of credit period is virtually nonexistent. The longer you have credit accounts, and continue to pay what you owe, the more your score will increase. If you are a parent, one trick that can help build up your child’s credit score early is to add them as an authorized user on your credit card. Then, as you make purchases and pay the monthly amount, their credit score will start to build. This can set your kids up with a financial head start once they are old enough to start making their own decisions.
New Credit Accounts
This is possibly the most frustrating element that affects a credit score. Often when you are applying for a loan or completing some other large financial transaction, a hard inquiry into your credit score will occur. Usually, this credit check will lower your score, though not by a huge amount. The more credit accounts you open, the riskier your spending appears to be for lenders. This is why having a good credit score makes it easier to obtain loans since your history indicates that you can reliably pay it back, though there are ways to obtain loans with a poor credit score. Try to limit the number of credit accounts that you have open and stick to only what is necessary so that your score can improve.
Research Best Practices for Improving Your Score
Maybe you already have a low credit score because of poor decision-making early on. However, it is never too late to start building your credit. Try to reduce the number of credit accounts that you have. Make sure that you are paying the full amounts owed on your loans and credit card statements. Avoid hard inquiries into your credit that reduce the score. Remember, credit history plays a role in elevating your score, so the longer you have these accounts, the more the score can improve if you are acting responsibly. There are other strategies for increasing that number, so do the research and learn how to make better decisions going forward.