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How to build your credit score

May 17, 2021
Man looking at phone and credit card; how to build your credit score

Your credit score matters. Why? Because it can significantly impact your ability to borrow money at a preferred interest rate. Credit-scoring companies plug in information from your credit reports into mathematical formulas that produce your credit score, which is typically in the range of 300 to 850.

A higher credit score will provide access to more credit products and attractive financing options at lower rates. Improving your credit score will improve your chances of being approved for the financial products you want at the best possible terms and rates. Before applying for credit, do what you can to build the best score possible. 

Here are some basic tips:

  • Avoid applying for multiple credit cards within a short period of time as this makes you appear as if you're trying to take on sizable debt at one time.
  • If you're applying for a mortgage or auto loan, conduct your rate shopping within a short, concentrated time frame. You will not be penalized for shopping around for the best rates as long as you do it within a generally accepted window of 14 days. By doing this, your multiple inquiries are more likely to be treated as a single inquiry that won't significantly impact your credit score.
  • Check your credit report regularly to ensure only authorized hard inquiries are appearing. Quickly dispute any unauthorized credit checks.
  • Pay your bills on time and pay off any credit card debt as quickly as possible.
  • Improve your credit utilization rate, when possible. This is the percentage of your total available credit actually used. So you're better off to apply for and qualify for higher lines of credit but only use a small percentage of what's available. Credit utilization is the second most important factor in credit scores, right after payment history.

Key Factors Affecting Your Credit Score

There are a number of factors that influence your credit score at any point in time. Those factors with the most influence include:

  • Payment history. This is the most important factor in credit scoring. Even one missed payment can negatively impact your score.
  • Amount of debt. This includes the amount of credit you are actually using, especially as it relates as a percentage of your total authorized credit. Most financial professionals agree that using more than 30% of your available credit makes your appear less favorable to lenders.
  • Credit history length. Lenders are particularly interested in the age of your oldest credit account, as well as the average age of all of your accounts. In general terms, the longer your credit history, the higher your credit score.
  • Credit mix. A diverse portfolio of credit accounts (mortgage, car loan, student loan, etc.) is preferred to simply having a lot of different credit card accounts.
  • New credit. The number of credit accounts you've recently opened, as well as the number of hard inquiries lenders have recently made, also impacts your credit score. 

How long do adverse credit events appear on your credit report?

Although poor credit decisions leading to delinquencies and even bankruptcy can haunt you for many years, the good news is that they do not permanently remain on your credit report. Late payments are deleted seven years from the original delinquency date. Closed accounts with no late payments may remain on the report for 10 years from the date they were closed. Chapter 7 bankruptcies remain part of your credit history for 10 years, while Chapter 13 bankruptcies continue showing up for seven years. Credit inquiries remain on the credit report for two years. 

How often do credit scores change?

Your credit report reflects your credit history at a specific point in time. If you check your report even a few hours or a day later, your score could be a little different each time. Things that are most likely to change your score include a late payment, application for new debt and a higher number of hard inquiries. According to FICO, a leading data analytics company focused on credit scoring services, consumers with five or more credit inquiries in the past 12 months are six times more likely to become 90+ days past-due on a credit obligation than consumers with zero inquiries. People with six or more credit inquiries may be eight times more likely to file bankruptcy compared with zero-inquiry consumers.

What's a good credit score?

Most credit scores are quoted in a range between 300 and 850. A score above 800 is considered exceptional, while scores 740 to 799 are very good. Having a credit score between 670 and 739 puts the borrower near or slightly above the average of American consumers, as the national average FICO score was 711 as of October 2020.

Borrowers with credit scores ranging from 580 to 669 are considered in the fair category and often have minor problems on their credit reports. They may likely still qualify for credit but will not be offered very competitive rates. Poor credit scores are those under 580. These may include people who have multiple defaults on different credit products.

It is possible to improve your credit score once you understand the factors impacting its calculation. But it cannot happen overnight. Rather, you will need to intentionally work on building it up over time by ensuring timely payments and limiting your use of available credit and the number of times you apply for new credit. 

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