What Affects Your Credit Score? The Ups, Downs and Everything In Between

It’s time to talk about everyone’s favorite topic – credit scores. 

Okay, maybe it’s not as exciting as the comeback of Crocs, but credit scores are still a big part of your financial life. Your credit rating can affect your ability to purchase a home or car, or even to get a credit card. If you want to reach those big life milestones, you’ll have to tune up your credit rating sooner or later. 

Still, the average credit score for millennials  in 2019 was only 668 – scoring a “Fair” evaluation on the charts (we’ll get deeper on this later). How can you beat the stats and work your way to better credit? Read on to find out.

We’ve rounded up everything you need to know about how your credit score is calculated, how to improve your rating and what mistakes might be holding you back from a higher score.

Understanding the Numbers

First things first: your credit score isn’t necessarily an exact science. In fact, there are three major bureaus – Equifax, Experian and TransUnion – in the United States that own the game when it comes to credit scores, and often they don’t line up perfectly. You usually don’t have to self-report any information to these guys; they’ll collect info from creditors automatically. You can request a free credit score from all three agencies to help you understand your credit history.

In addition to different scoring models (aka  FICO and  VantageScore), the reason behind any discrepancies likely lies in the fact that these bureaus don’t always have the exact same information. Maybe your credit card company keeps TranUnion up to date on your account balance, but is a little slower reporting to Equifax. Regardless, you shouldn’t expect to see too huge of a gap between your scores.

The Grading Scale

Each of the three reporting bureaus use the same basic structure to “grade” your score, ranging from Bad credit to Excellent. 

According to NerdWallet, these are the generally accepted grading guidelines:

  • Bad: 629 or below
  • Fair: 630-689
  • Good: 690-719
  • Excellent: 720+

The better your score, the more likely you are to get approved for various loans. But how can you improve your score to up your chances of loan approvals? 

5 Ways to Improve Your Credit

Several things can improve your credit score in both the long and short term. Some of the biggest steps you can take involve keeping accounts open and paying your bills on time. 

1. Open more accounts

This one might seem counterintuitive, but it’s true – credit bureaus like to see that you’re using a variety of accounts: credit cards, student loans, mortgages, etc. While your number of accounts isn’t a huge factor in your overall score, it can have a significant impact over time.

Don’t go crazy in your pursuit to add more accounts, though. A good rule of thumb is to aim for about five open accounts.

2. Keep them open

In addition to the number of accounts, lenders also like to see that you’ve had them for a while. The more history you have, the better. This has an even bigger impact than your number of accounts. 

Your credit age is the average length of all your lines of credit together. If you’re looking to close down any of your accounts, it’s best to start with the newer ones first to keep your overall age higher.

3. Pay your credit cards off each month

This one is a no-brainer but it’s worth mentioning because it has such a huge impact on your credit score. One or two missed payments can drag you down major points.

Credit bureaus calculate your score by taking the number of on-time payments as a percentage of your overall payments – and they want to see that number as close to 100% as possible.

If you’ve made 100 payments on your Amazon credit card, and four of those payments were late or missed, you’re already down to a 96%. While that score might’ve been an A in high school, it’s considered pretty bad on a credit report. 

Payment history is a big deal to lenders, so make sure to pay off those bills each month!

4. Keep your balances low

While it’s good to have accounts (and use them), you also want to keep your credit utilization in mind. 

Credit utilization is the percentage of your overall available credit that you’ve borrowed. Think of it like this:

You opened up a Target RedCard and they gave you a $1,000 spending limit. If you carry all $1,000 of that balance each month, creditors get grouchy. A great rule of thumb is to keep your credit utilization under 30% or so. So if your limit is $1,000, try to keep your balance under $300 as much as possible.

5. Be Patient

Lastly, it’s good to remember that building a good credit score takes time. Your number might jump or dive depending on the day, but if you practice overall financial wellness, you’re likely to see big improvements over time. 

If you need to get your number up quick, then consider consulting a financial advisor that can pinpoint specific areas of improvement for your accounts. 

What Hurts Your Credit?

Aside from the above tips, there are a few moves you’ll want to avoid when trying to keep your credit score high. 

1. No credit history

Many people avoid borrowing any money to keep their credit nice and safe, but that can be harmful to your score, too. Lenders want to see a history of borrowing and paying back money responsibly – if you have nothing on your credit report, they don’t have much to use for reference.

The key isn’t not borrowing – it’s borrowing responsibly.

2. Paying off your loans

This one also seems totally backwards, but you did read that correctly. Paying off your student loans essentially erases them from your credit report, dragging down your length of credit history and number of open accounts. 

It doesn’t make sense, but it’s true. If you run into a bunch of money and can suddenly pay off that student loan in total, you may want to think twice about how it will affect any big purchase you may need a loan for in the near future. 

3. Applying for too many lines of credit

Every time you buy something on Amazon, they offer you huge discounts if you’ll just fill out a simple application for their credit card. And it’s not just Amazon: Target, Best Buy, Kohl’s – it seems like everyone wants you to shop with their card. 

Sometimes it’s hard to resist, but we’re here to tell you that it’s probably not worth it.

While having several open accounts can boost your score, applying for those accounts may hurt it overall. Any time a lender asks to view your credit report, it’s known as a “hard inquiry.” Too many hard inquiries in a short period of time can hurt your score and seem fishy to lenders. 

Instead of applying for every credit card in sight and hoping for the best, do your research and choose one or two that really make sense for your situation. 

Your credit score can have a huge impact on your ability to fund your life goals, so it’s worth your time to become knowledgeable about what helps and hurts your score. And if you’re looking for even more ways to set yourself up for financial success, an advisor can always help!

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