CHAPTER 1

Why Credit Scores Matter

Your credit score is a financial report card. It’s designed to predict the probability that you will default on a loan, but it has taken on much wider importance.

Any time you apply for a loan, credit card, or any other form of credit, the lender will check your credit score. If your score says you’re a risky borrower, they may raise your interest rate and fees.

If your score is really low, you may not get approved for credit at all.

Some employers will check your credit score before making a hiring decision. Landlords will check your credit before agreeing to rent to you.

Bad credit can be expensive. If you can’t get approved for loans or credit cards you may be forced to use very expensive forms of credit like payday loans to cover a shortfall.

Paying a high interest rate can be a huge cost, especially on large loans like a mortgage or a car loan. If you routinely carry a credit card balance interest costs can add up to hundreds or thousands of dollars every year.

Good credit, on the other hand, can open doors and save you money.

Understanding your credit score and how it is generated can help you build better credit, gain opportunities, and save money.

A good credit score isn’t just about better loans and credit cards or better prices, though. It’s a sign that you are managing your money effectively. The same habits that help you build better credit will help you achieve other financial goals.

CHAPTER 2

Where Your Credit Scores Come From

Credit Bureaus

Your credit score is based on information compiled by three credit reporting companies, often called credit bureaus. They are private companies, not government agencies.

These three companies – Experian, Equifax, and TransUnion – collect information from your creditors and assemble it into credit files.

Creditors are not required to report to the credit bureaus. In fact, they have to pay to report. For this reason, not all creditors report to all three credit bureaus. Major lenders and credit card issuers usually report to all three, but smaller ones may report to only one or two.

Lenders who report to credit bureaus don’t just have to pay, they are also subject to regulation under the Fair Credit Reporting Act (FCRA). That’s why many utility companies, rental property owners, and other companies that bill you don’t report.

Payments that are not reported to the credit bureaus will not affect your credit score.

Credit Score Providers

The three major credit bureaus collect the information that goes into your credit score, but they don’t provide the score itself. Most credit scores come from two companies.

• The Fair Isaac Corporation, or FICO, is the dominant provider of credit scores. Most lenders base decisions on FICO scores. FICO provides multiple scores, including scores used by specific types of lenders.
• VantageScore, a newer score provider, was developed by the three major credit bureaus to compete with FICO. It is not used by many lenders but it is widely used by free credit score providers.

These companies use different algorithms or scoring models to generate credit scores. Both are based on the information in your credit reports. If you have an excellent FICO score you are likely to have at least a very good VantageScore as well, but there may be significant differences between the two scores.

There are two variables that generate different credit scores:

1. Different Models

Each of the credit score providers upgrades its algorithm periodically, and lenders can choose which score to use. For example, FICO’s latest general-purpose score is the FICO 9 score, but many lenders still use FICO 8. These scores may be different.

In addition, FICO in particular generates specialized scores for specific types of lenders. The FICO Auto Score, for example, prioritizes your record in making car payments and is used by auto lenders.

You cannot get specialized FICO scores from any free credit score provider. If you want to see all your FICO scores the only way to do it is by signing up for MyFICO. Learn more about this service in our MyFICO review.

2. Different Bureaus

When a lender pulls your credit score they typically get it from one credit bureau. Because not all lenders report to all bureaus, these scores can be different. A FICO 8 score from Experian may not be the same as a FICO 8 score from Equifax.

For example: Imagine that you have a debt with a small lender that reports only to Equifax. If you don’t pay that debt and it is charged off, that will only appear on your Equifax credit report. Your scores based on an Equifax credit report will be lower than scores based on other reports.

How Many Scores Do You Have?

There are 28 types of FICO scores, but only 16 are in current use. Each of those may vary depending on which credit bureau it’s drawn from.

Keeping track of one credit score can seem complicated, so how do you keep track of 48?

The answer is simple: you don’t have to.

If you want to track your credit, stick to the basics.

• You are entitled to one free credit report every year from each credit bureau. You can get these reports from www.annualcreditreport.com. Check each report each year so you know which accounts are reported to which bureaus. In most cases, your reports will be similar, though not necessarily identical.
• Find a way to track your credit score. Many credit cards, banks, and other institutions allow you to see your score for free. Tracking your score on a regular basis will give you a general sense of how you are handling credit.
• Understand that there may be differences. If you are applying for a loan or credit card, avoid applying if the score you know is close to a cutoff point. The score the lender pulls could be lower. Give yourself a margin of safety.

The credit reporting and scoring system is complicated, but don’t let that keep you from keeping track of your credit and understanding it.

If you’re going to be using credit, you need to understand your credit reports. Unfortunately, there’s a lot of information packed into them and no small amount of financial jargon. You’ll need to learn how to read a credit report.

CHAPTER 3

What Affects Your Credit Score?

Most credit scoring models use the same basic criteria to determine your credit score, Different models may give different weights to these factors or interpret them differently, but the basic ingredients that make up your credit score will be similar.

FICO uses five elements to create your credit score.

VantageScore uses similar elements, though the weighting varies.

Let’s take a closer look at the components that make up your credit score.

1. Payment History

Payment history is the single most important element in both VantageScore and FICO scoring models. Creditors want to know whether you have paid previous debts reliably and made on-time payments consistently. 

In most cases, a payment will be reported as late if you have not paid within 30 days after the due date. A late payment will damage your credit score. If you still haven’t paid after 60 and 90 days that will be reported and will do more damage to your score.

After 90 days your creditor may charge off your account. At this point, they consider the debt uncollectible. A charge-off will do serious harm to your credit score. If the account is sold to a collection agency a collection account will be listed on your credit report and your credit score will fall further.

On-time payments, on the other hand, will build a higher credit score.

The single most important part of improving your credit score is making on-time payments.

2. Amounts Owed / Credit Utilization

These are two ways of describing the same concept: how much you owe relative to your total available credit. It’s typically computed using only revolving credit accounts, such as credit cards.

Each of your revolving credit accounts has a fixed credit limit: the maximum amount you can borrow on that account. Each account also has a balance, which is the amount you owe at a given time.

Your credit utilization ratio is the percentage of your limit that you actually use.

For example: If you have a credit card with a $5000 credit limit and your balance is $1000, your credit utilization ratio on that card is 20%.

Credit scoring algorithms look at your combined total credit utilization and at your credit utilization on each account. Even if your total credit utilization is low, one maxed-out account can still harm your credit.

Most experts advise keeping both your total credit utilization and your credit utilization on each account under 30%. That is not a magic number and your credit score will not fall off a cliff if you exceed it. It is a general rule, and a ratio below that level will not harm your credit.

It’s important to remember that your credit utilization rates are based on your balance on the day that your card issuer reports to the credit bureaus.

It’s a good idea to learn when your issuer reports and pay off large balances before then. Keeping those balances low all the time is even better!

3. Age Of Credit Accounts

This factor, which is often referred to as the AAOA or Average Age Of Accounts, is one factor that you can’t do much about.

Basically, it’s the age of your oldest credit account, the newest accounts, and the average ages of all the accounts on your credit file.

Here’s a sample report on a consumer’s age of credit accounts. 

It will help to keep your oldest accounts open for as long as possible, even if you aren’t using them.

This is because if the oldest account falls off your report, it will shift your average age of accounts and affect your credit score. Closed accounts will not contribute to the average age of your accounts.

4. Types Of Credit Accounts (Credit Mix)

Credit scoring models favor consumers that have shown that they can handle multiple types of credit. A good credit mix includes a blend of revolving credit (like credit cards) and installment credit (loans).

There are several types of accounts:

• Credit Cards (Revolving Account)
• Line Of Credit (Revolving Account)
• Store Card (Revolving Account)
• Personal Loan (Installment Account)
• Student Loan (Installment Account)
• Mortgage Loan (Installment Account)
• Auto Loan (Installment Account)

Maintaining a balance of these types will improve your credit mix and help you build better credit.

5. New Credit / Number Of Credit Inquiries

Every time you apply for new credit, a hard inquiry is registered on your credit report. This will have a negative impact on your credit score.

It’s important to understand the difference between hard and soft inquiries. Hard inquiries affect your credit, soft inquiries do not.

A single hard inquiry will have a very minor impact on your credit score, and the impact will fade quickly. A large number of hard inquiries in a short period of time can do much more harm to your credit: a mass of hard inquiries makes you look like you are desperate to add credit accounts.

A hard inquiry can only be added to your credit report with your written permission. When you sign an application for credit you are authorizing the lender to make a hard inquiry.

If you see a hard inquiry on your credit report that you do not recognize, call the lender (the number will be listed on your credit report) and ask why they are on your credit report. It could be a mistake or an early sign of identity theft.

If you are shopping for the best deal on a loan or credit card, keep all of your applications within a 15-day period. The credit bureaus will recognize that you are shopping and record only a single hard inquiry.

Bankruptcy and Other Public Records

At this time the only public record that will appear on your credit report is a bankruptcy. A Chapter 13 bankruptcy will remain in your credit report for 7 years. A Chapter 7 bankruptcy will remain on your credit report for up to 10 years.

Other public records, like tax liens, civil judgments, or child support decrees, will not appear on your credit report. However, many lenders will perform public record searches before making a lending decision, so these records may still affect lending decisions.

Factors That Don’t Affect Your Score

None of these factors will have any impact on your credit score: 

• Race
• Religion
• National origin
• Sex, gender, sexual preference, or marital status
• Age
• Salary
• Occupation
• Title
• Employer
• Date employed or employment history
• Where You Live

This information is not recorded on your credit report, and it cannot affect your credit score.

How Long Do Records Stay on My Credit Report?

Negative entries on your credit report are not there permanently. They will drop off eventually.

Most negative records will disappear from your credit report seven years from the date when the account became delinquent and was not subsequently brought up to date.

The impact that a record has on your credit also fades with time. Newer records have more weight than older ones. A Chapter 7 bankruptcy will be on your credit report for 10 years, but if you add consistently positive records its impact on your score will be reduced to a minimal level well before the account itself drops off your record.

CHAPTER 4

What Is A Good Credit Score?

Most credit scoring systems range from 300 to 850. Each credit score provider has its own credit score ranges, which define what score the provider considers excellent, good, fair, or poor.

Credit score ranges determine how likely you are to be approved for a loan or credit card and what interest rate you will pay. If your credit score is good you will be approved for most credit products and you’ll pay low interest rates.

If your credit score is low it may be difficult to get approved for a loan or credit card. If you are approved you will pay high interest rates, because the lender sees you as a high-risk borrower.

What Is A Good FICO Score? 

The FICO score was created by the Fair Isaac Corporation in 1956 and has become the score of choice for over 90% of lenders.

Remember that lenders may have their own classifications for what constitutes a good credit score.

What Is A Good Vantage Score?

The VantageScore is a relatively new type of credit score that more lenders are starting to use.

Your VantageScore may be different than a FICO score, but it is based on similar criteria. If you have a good VantageScore you are likely to have a good VantageScore as well.

Most lenders use FICO scores to determine your creditworthiness. If you are checking your score through a free credit score provider, you are probably seeing a VantageScore. They may be different.

It’s always worthwhile to try and improve your credit score. A good or even fair score may be enough to get you approved, but you’ll pay higher interest rates that could cost you thousands of dollars over the life of a large loan like a mortgage or car loan.

CHAPTER 5

How To Improve Your Credit Score

Improving your credit score doesn’t really take that much skill as long as you don’t try to rush the process. The steps you need to take are pretty simple and they will improve both your credit score and your overall financial management.

Most people who are trying to improve their credit fall into one of two categories.

• People with no credit have an advantage. When you start with a blank slate you can build a great record with no negative records to drag you down. Find out more about how to start building credit at 18.
• People with bad credit will need to take more time and work a little harder. Those negative records will stay on your credit report for some time, and you’ll need to balance them out with good ones. Find out more about how to rebuild damaged credit.

Either way, don’t expect to build credit overnight. The process takes time, but it’s worth the effort!

These steps will help you build better credit.

1. Pay Your Bills On Time

It sounds simple, and it is. It’s still the single most important part of building your credit score. Payment history is the most influential component of your credit score, and making every payment on time will build a solid payment history.

Paying every bill on time is not just a way to improve your credit. Late payments can rack up costly late payment fees and pile up debts that can quickly become unmanageable. If you can’t make payments on time, something is wrong and you need to do something about it.

If you already have late payments on your record, you can still improve. Credit scoring models give recent records more weight than older ones. Start making on-time payments today and your score will improve.

2. Take Charge of Your Credit Utilization

Credit utilization is a major influence on your credit score. You’ll need to avoid maxed-out cards at all costs and keep your balance below 30% of your limit. Lower is better.

Follow these steps.

• Limit card use. If you use your card for everything it will be hard to keep your utilization low, especially if your card has a low limit. Only use your card when you really need to and use it wisely.
• Make multiple payments. Making payments several times a month will help you keep your balance down.
• Know when your issuer reports. Your credit utilization is a snapshot taken on the day your issuer reports to the credit bureaus. Find out when your issuer reports each month and make your payment well before that day.
• Pay your balance in full each month. Carrying a balance will make it very difficult to keep utilization low. You’ll also be paying interest at very high rates.
• Ask for a credit limit increase. A higher credit limit will lower your credit utilization. Just be sure you don’t raise your spending to match your new limit!

3. Manage Your Applications

Every time you apply for new credit, a hard inquiry is registered on your credit report. A single hard inquiry will have a minor impact on your score. If you start piling on the hard inquiries you’ll look desperate, and your credit will suffer.

Only apply for new credit if you really need it. Try to space your inquiries out. If you’ve just applied for a loan or credit card, wait six months – or even longer – before you apply for another one. 

If you’re shopping for the best deal on a loan, keep all of your applications within a 15-day period. The credit bureaus will recognize that you are shopping and record only a single hard inquiry.

4. Don’t Close Old Accounts

If you have an old credit card that you’re not using, you may be tempted to close the account. If you do you will reduce the length of your credit history, which can cut your credit score. It’s best to keep those accounts open, even if you’re not using them.

The exception to that rule would be a card that has an annual fee. The whole point of building credit is to save money, and you shouldn’t have to pay to do that.

If your old card has a fee, ask the issuer if they will upgrade you to a no-fee card. If they won’t, it’s probably best to go ahead and close it. Your credit will recover, but the money you pay in fees is gone forever.

5. Watch Your Credit Reports

You are entitled to a free credit report from each credit bureau every year. You can get these reports from annualcreditreport.com.

Get your credit reports regularly. Many people choose to get one every four months. Read them in detail and be sure you know how to understand a credit report.

Over a third of credit reports contain errors that can damage credit scores. Inspect your credit reports carefully and look for accounts or hard inquiries that you don’t recognize. If you find them call the company – the phone number will be listed in the entry – and ask why they are on your credit report. It could be legitimate, it could be an error, or it could be an early sign of identity theft. You need to know which.

If there is a mistake on your credit report you can dispute the entry and have it removed.

6. Negotiate With Creditors

If you have a delinquent account or you think you can’t make a payment, take the initiative. Contact the creditor, explain the situation, and ask to set up a payment plan.

Many creditors are willing to work with debtors who are experiencing financial trouble, especially if it’s due to factors beyond their control, like medical bills or job loss. Taking the first step is a sign of good faith.

You may be able to prevent a late payment from being reported or stop an account from being sent to a collection agency. That will prevent further damage to your credit score.

If you already have an account with a collection agency, start by learning how to deal with collection agencies.

If you’re sure the debt is yours and the statute of limitations has not expired, offer a debt settlement. Debt collectors pay an average of 4 cents for every dollar of debt they buy, so they can accept less than the full amount of your debt and still make a profit.

You may be able to get a collection agency to delete your record with the credit bureaus in return for a settlement. Use a pay for delete letter to propose this arrangement. It’s not guaranteed to work, but it’s worth a try.

7. Add New Accounts Strategically

If you have no credit or a thin credit file adding accounts will be a core part of your credit-building strategy. If you have a bad credit record adding new accounts will be less effective, but it can still help.

Here are some ways to add accounts to your credit record.

• Become an authorized user. A friend or relative can add you as an authorized user on their credit card and share their credit history.
• Use a secured credit card. Secured credit cards are readily available and many are fee-free. Use it wisely and it will build your credit.
• Get a credit-builder loan. Credit-builder loans aren’t free, but they can be an affordable way to add an installment loan to your credit record.
• Report your utilities. Services like Experian BOOST and eCredable Lift can put your utility payments on your credit record.
• Try rent reporting. Rent reporting services can put up to two years of rent payments on your credit record. These services can be expensive, so compare carefully. Choose one that reports to all three credit bureaus.
• Use credit-building products. There’s a wide range of new ways to build credit out there, from credit-building debit cards to ways to report streaming service payments. Choose carefully!

You won’t need to use all of these methods. Compare carefully and select the best mix for you.

Watch for hidden costs: some store credit cards offer low fees or no interest but restrict you to buying overpriced goods at their stores!

Before you pay for a credit-building product, remember that you can build credit for free!

8. Don’t Fall For Hype or Scams

Lots of people will promise to fix your credit overnight. You’ll hear all kinds of stories about 100% effective credit repair, or about magic letter templates or dispute methods that will make even legitimate accounts disappear from your credit report.

Take a deep breath and be skeptical. If it sounds too good to be true it probably isn’t true, especially if someone wants you to pay them!

9. Wait… Seriously… Just Wait

My last tip is that you need to wait.  

This is probably the oddest thing you can do to get a better credit score; however, it is the most crucial step. 

Most people want to see an instant change in their credit, and they want to be able to buy that car or get the home they dreamed of. 

Unfortunately, the one thing you have to do with credit is to wait.

Expect to take at least a year to put a plan into action, put new accounts on your credit, and allow old ones to fall off or fade away. 

Waiting also helps you increase your average age of accounts, which can only increase with time. 

I know you didn’t want to hear that, but it’s the last and best piece of advice for increasing your credit score.

BONUS CHAPTER

What’s A Good Credit Score For Loans By Type?

Credit scores are used by lenders to help predict the likelihood of default. Lenders want to be paid back and credit scores help them assess the risk of losing their money.

Different loan types require different credit scores. Remember that these are averages, and different scores will have different requirements.

What Is A Good Credit Score For An Auto Loan?

Auto loan rates by credit score are divided into five categories, with Super Prime being the highest and deep sub-prime the lowest. 

Auto loans are secured loans. The Vehicle is collateral for the loan. This lets lenders extend credit to less qualified buyers, but the interest rate will be high.

What Is A Good Credit Score For A Personal Loan?

Personal loans are broken into four credit score categories, and to keep things confusing, they are usually referred to them as excellent, good, fair, or bad/poor. 

Personal loan APRs for each credit score range vary widely with the lender, but as always, higher credit scores will get lower rates.

Personal loans are the Swiss army knife of loans. They can range from $1,000 to $100,000 with payment terms as short as six months and as long as seven years.

Personal loans can be used for a variety of needs:

• Debt Consolidation
• Payoff Credit Cards
• Home Improvement 
• Emergency Cash
• Medical Bills
• Education
• Business Start-up
• You name it!

Most personal loans are unsecured by any collateral and have lower interest rates than credit cards but higher rates than secured loans.

People with excellent and good credit scores will receive the best rates because they are at a lower risk of not paying back the lender.

As your credit score become fair and lower, the number of lenders willing to risk giving an unsecured personal loan dwindles fast.

Even with a bad credit score, there are still some personal loan options, albeit, at interest rates between 35% and 155%.

While these are personal loans, they are usually also marketed as ‘installment loans,’ which is basically a payday loan that has longer payment terms between 6 months to 7 years.

Caution! A personal loan with an APR rate of 100% will double in value each year. If you have to take out a bad credit loan, use the smallest amount possible for the shortest possible length of time.

What Is A Good Credit Score For A Mortgage?

A mortgage is the largest loan most people will ever take out. Your credit score has a large impact on your chances of approval and on the interest rate you will pay.

Mortgage rates per score range (February 2022):

You may be able to get an FHA mortgage with a score as low as 580, but you will pay for mortgage insurance and your interest rate will be high.

Because mortgages are very large loans with long terms, a small difference in rates can translate to a very large difference in cost. The difference between 3.507% and 4.328% doesn’t sound large, but with a 30-year fixed-rate mortgage of $423,100, that adds up to an additional $71,713 in interest cost!

If you’re considering buying a home it will be very much worthwhile to build up your credit score first!

Your Turn To Take Action

Now that you know what a good credit score is and how to get one it’s your turn to take action.

You know the exact steps it will take to step away from having bad credit or no credit and build a better credit score.

You have a ton of options so don’t waste any time. The sooner you build a better credit score the better your overall financial life will be.

The post What Is a Credit Score: Definition, Factors and How to Improve It appeared first on FinMasters.

There are many reasons your credit score could drop unexpectedly. Some are innocuous, while others could require quick attention to fix.

Components of Your Credit Score

To understand the different ways that your credit score could drop unexpectedly, it’s important to understand how credit scores work.

Your credit score is composed of five factors, in order from most to least important:

• Payment history
• Amount owed/credit utilization
• Age of credit
• Credit mix
• New credit

Changes in any of these factors could cause your score to drop.

Why Your Score Could Go Down When Nothing Changed

There are a variety of explanations for a surprise drop in your credit score.

Using a Different Scoring Model

One of the simplest and least worrying reasons that your credit score could drop unexpectedly is that you’re not comparing scores that used the same model.

When people think about their credit score, they often think of it as a single number, but that isn’t quite true. There are many different credit scoring models out there.

Two popular credit scores are the FICO Score and the VantageScore. They both look at similar factors, but they weigh things slightly differently.

Even within the FICO Score and VantageScore systems, there are differences. For example, FICO has FICO 8, FICO 9, FICO Auto Score, FICO Bankcard Score, and more. All of these scores are used by different lenders for different purposes.

Even if you’re looking at two scores calculated using the same model, if the information put into the formula differs, the answer will be different. Each of the three major credit bureaus can have slightly different information about your interactions with credit based on which bureaus your lenders report to.

If you’re looking at a score calculated using data from Equifax and comparing it to a score using data from TransUnion, there may be a slight difference between the two. If you’re comparing a VantageScore (often used by free credit score providers) to your FICO score, there could be a significant difference.

If you’re asking yourself, “why did my credit score go down when nothing changed?” the first step to take is to make sure that you are comparing scores of the same type.

Unexpected Hard Inquiry

Understanding the reasons behind a credit score decline is essential, particularly when you find yourself asking, “Why did my credit score go down when nothing changed?” One common but often overlooked reason is the effect of hard inquiries.

Whenever you apply for a credit card or loan, the lender will check your credit score with one or more of the credit bureaus. When this happens, the credit bureau places that information on your credit report. This is called a hard inquiry, and each hard inquiry on your credit report can cause it to drop by a few points.

A loan isn’t the only thing that can lead to a hard inquiry into your credit.

Renting a car, especially if you pay for the rental with a debit card or cash, could lead to a hard inquiry. The rental company will check your credit to make sure you’ll be able to pay for any damage or other issues with the card.

Signing up for a new cell phone plan could also lead to a hard inquiry if you’re trying to get a monthly contract. The cell phone company wants to make sure you’ll pay your bill before offering service.

Asking an existing credit card provider for a credit limit increase or applying for a business credit card can lead to hard inquiries on your personal credit as well.

If your credit score has dropped due to an unexpected hard inquiry, the impact is likely to be small, and it will fade quickly. As long as you can confirm that the inquiry was, in fact, caused by your actions, it’s not a major concern.

Co-Signing On a Loan

Co-signing on a loan can be another reason why your credit score could go down when nothing changed. When you co-sign on a loan for someone else, it can help them qualify for a loan they otherwise wouldn’t get or secure a lower interest rate. The reason for this is that you’re promising to pay the debt on their behalf if they aren’t able to make payments.

Because you’re sharing responsibility for the loan when you co-sign, the lender will want to check your credit, which means a hard inquiry will show up on your credit report. The loan balance and payment history will also show up on your credit, which could also cause it to drop by a few points.

An Old Account Was Closed

If you’re puzzled by the question, “Why did my credit score go down when nothing changed?” consider the impact of old credit accounts. You may have an old credit card lying around that doesn’t see much action these days. After a long enough period of inactivity, your credit card issuer might choose to close the card because you’re no longer making any purchases on it.

Closing an old account, either intentionally or through inactivity, can cause your credit score to drop, sometimes by quite a lot.

First, closing an old account lowers the age of your credit accounts. The older your average credit account, the better your score will be. For example, if you have three cards, one that’s 10 years old, one that’s 4 years old, and one that’s 1 year old, letting the oldest one close will drop the average age of your accounts from 5 years to 2.5 years.

That can lead to a big decrease in your score.

Closing an account also reduces your available credit, which can boost your credit utilization ratio. Your credit utilization ratio is the percentage of your total credit limits that you’re using. The more credit you have access to, the more of a balance you can build up without lowering your score by much. Removing some of your available credit means that a lower card balance will have a bigger impact on your score.

Your Credit Card Balance Went Up

This is another explanation that’s tied to your credit utilization ratio. If you spent a bit more on your credit cards than usual this month, it could lead to a drop in your credit score.

When your card statement closes, your credit card issuer sends details about your account, including its balance, to the credit bureaus. Even if you pay the balance off in full, the credit bureaus still see that higher balance, which can lead to higher credit utilization.

The good news is that credit bureaus don’t track the history of your credit utilization. Once you pay off the card and the card issuer reports next month’s balance, your score will return to normal so long as your balance also returns to normal. However, this does mean that big purchases on a credit card could cause a temporary drop in your credit.

If you plan to apply for a major loan, like an auto loan or mortgage, it’s important to try and avoid using your credit cards for large purchases as it can cause a drop in your credit score, making you wonder, “Why did my credit score go down when nothing changed?”

A Lender Reduced Your Credit Limit

Credit card issuers don’t usually make changes to your credit limit unless you ask for a credit limit increase, but they’re well within their rights to adjust your credit limits at will. That can mean increasing them or reducing them.

If one of your credit card issuers reduces the credit limit on one of your credit cards, that will reduce your total available credit. Like making larger than normal purchases using your credit card, which can cause your credit utilization to rise, causing your score to decrease and making you wonder why your credit score went down when nothing changed.

A Mistake On Your Credit Report

Credit bureaus aren’t perfect. They do make mistakes, and there could be inaccurate information on your credit report. Adding an account that isn’t yours, marking a timely payment as late, or putting the wrong number for a balance or credit limit could all cause your credit score to drop.

If there’s a drop in your credit score and you are thinking, “Why did my credit score go down when nothing changed?” it’s a good idea to check your credit every once in a while to make sure your credit report is error-free. Each bureau is required, by law, to give you a free copy of your credit once per year, and there are many other free services you can use to monitor your credit.

If you identify an error, reach out to the credit bureau to dispute it. Each bureau has a slightly different process for reporting errors, so make sure to follow the appropriate process based on the bureau that has inaccurate information.

Identity Theft

Dealing with the confusion of “Why did my credit score go down when nothing changed?” can sometimes be traced back to identity theft, a serious problem that affects many people. More than 300,000 Americans fall victim to scams that can lead to identity theft each year.

If someone steals your identity, they can do a lot of things that will damage your credit score. Applying for new loans in your name and racking up debt are among the most common ways identity thieves will damage your credit.

Confused about a sudden #creditscore drop with no apparent reason? See why it might happen in our new article.

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If you think you’re a victim of identity theft, the first thing to do is reach out to the credit bureaus and put a fraud alert on your credit. This will help prevent the thieves from opening any more accounts in your name. You’ll also want to file a police report. The FTC has an identity theft report page that can generate a recovery plan for you.

Reach out to any companies that the fraudsters have opened accounts with and let them know that the accounts were not opened by you and that you’ve been a victim of identity theft. You should also check your credit card and bank statements to make sure no one has accessed those accounts without your permission.

As you recover, consider signing up for an identity or credit monitoring service so you can try to prevent identity theft from happening again.

Derogatory Marks Added to Your Report

One of the most common reasons for a drop in your credit score is a derogatory mark on your credit report. If you’re asking yourself, “Why did my credit score go down when nothing changed?” it is always possible that you have overlooked a payment, and it was reported as late.

Check your financial records to be sure you haven’t missed anything…

What to Do When Your Credit Score Drops Unexpectedly

Many people often wonder, “Why did my credit score go down when nothing changed?” If you notice an unexpected decrease in your credit score, the first thing to do is see how much it’s gone down. A minimal drop is nothing to get alarmed about. Just keep track and make sure the trend doesn’t continue.

If the drop is significant, you’ll need to figure out what the root cause is.

The best way to do this is to check your credit reports. This will tell you if there are any actual changes in your credit history that could have brought your score down. You will need to know how to get your credit report and how to read a credit report.

Some of the things that can cause a drop in your credit are no big deal. For example, looking at a score produced using a different model or having a slightly higher credit card balance in one month is not a cause for major concern.

Some changes require immediate attention. If you notice mistakes on your credit report, you need to report them to the credit bureaus as soon as possible. Identity theft also requires an immediate response.

If your credit score has gone down when nothing changed in your financial life, you don’t need to panic. You do need to find out what happened and why!

The post Why Did My Credit Score Go Down When Nothing Changed? appeared first on FinMasters.

The formulas that determine your credit score aren’t just random facts. Understanding them can help you make better financial decisions.

In this post:

• Where Do Credit Scores Come From?
• How Your FICO Credit Score Is Calculated
• How Your VantageScore Is Calculated
• What Does Not Affect Your Credit Score?

Where Do Credit Scores Come From?

The information contained in your credit reports is the basis of your credit score. Creditors submit this information voluntarily in reports to the three major credit reporting companies: Experian, Equifax and TransUnion.

If you’d like to get a copy of your credit report know that each credit reporting company is obligated to provide you with one free credit report every year.

Not all creditors report to all three of these companies, and they may report on different schedules. That means that your three credit reports will often be slightly different, and may be significantly different.

Credit score providers process this information using proprietary algorithms, and produce your credit score. There are two primary credit score providers.

• FICO, or the Fair Isaac Corporation, has been in business since 1956 and is the dominant provider of credit scores. Most lenders use FICO scores to assess creditworthiness.
• VantageScore was initiated in 2006, a joint project of Experian, Equifax, and TransUnion. Most providers of free credit scores use VantageScore.

Your lender is probably using a FICO score and your free credit score provider is probably using VantageScore. That means you may be looking at different scores, which could cause some confusion.

Your credit score is not held on file and is updated on a schedule. Each score is generated as a response to a request. It’s a snapshot of your credit file at the time of a given request, and it can change from day to day as new information is reported.

How Your FICO Credit Score Is Calculated

Your FICO credit score is calculated using five credit factors.

Let’s unpack what each of the five contributing factors means, and how they affect your credit score calculation.

1. Payment History

This is the item most consumers associate with credit scores. It’s also the largest single component in the calculation, with a 35% weight. Naturally, this factor takes your payment performance into account. It also measures that history against the total amount of credit you have outstanding.

2. Amounts Owed

If you’ve ever heard the term “credit utilization,” this is where it figures into the mix. Though the amounts owed represent 30% of your credit score calculation, it’s not based on a fixed amount of debt. Rather, it’s based on the percentage of your available credit that you are actually using.

The credit scoring models perform similar calculations with installment loans.

The credit scoring models favor credit utilization ratios below 30%. That’s not a fixed boundary and your score won’t fall off a cliff if you cross it, but it’s best to stay below it. Lower is even better, but you don’t want a credit utilization ratio of zero, which indicates that you aren’t using credit at all.

FICO’s “high achievers” – people with credit scores from 800 to 850 – have an average credit utilization of 4%^[2].

3. Length of Credit History

This factor makes up 15% of your score and plays a much smaller role in your credit score calculation than payment history and amounts owed. It still can make a substantial impact on your credit score.

Credit scoring models reward consumers with longer credit histories. For example, if you’re fresh out of college and have only two credit lines – the oldest being one year – your credit history will be shorter than it will be for someone who has multiple credit lines open for the past decade.

Length of credit history determines how long you’ve been managing credit. The longer you’ve been doing so successfully, the more you help your score.

If you have no credit history read our guide on how to build credit at 18 (or any other age).

4. Credit Mix

Credit scoring models reward credit balance. For example, if you have a mortgage, a car loan, and five credit cards, you’ll have a better credit mix than you would if your entire credit profile was limited to just five credit cards.

The reason credit mix is considered important is that it shows the consumer’s ability to successfully apply for different forms of credit and the ability to manage multiple financing types in combination successfully.

Scoring models prefer to see a balance between revolving credit, like credit cards, and installment credit, like a car loan, student loan, or mortgage. If you only have a single type of debt, you’ll be penalized for overreliance on that type of financing.

5. New Credit

Credit scoring models have an inherent preference for established debt. That’s because your payment history can easily be measured, making it easier to predict successful management of the loan. New credit, on the other hand, is an X factor. There’s no history to show how well you’ll handle that new credit line.

Applying for a lot of new credit quickly can mean that you’re desperate for credit.

This makes a strong case for adding new credit only when you really need it. If you have two open credit lines, then apply for three new ones within one year, the scoring models will consider you to be a greater risk. Every time you apply for new credit a hard inquiry will register on your credit report, and multiple hard inquiries can harm your credit.

One exception to this rule: if you’re shopping for a loan and keep your inquiries within a 15-day period, the credit reporting companies will recognize that you are shopping and register only a single hard inquiry.

How Your VantageScore Is Calculated

Your VantageScore credit score is calculated using somewhat different criteria, and VantageScore weights those criteria according to its own algorithms. VantageScore doesn’t provide percentages, but rates the overall influence of each component it uses.

1. Total Credit Usage, Balance, and Available Credit are “extremely influential”. This includes credit utilization.
2. Credit Mix and Experience are “highly influential”.
3. Payment History is “moderately influential”.
4. Age of Credit History is “less influential”.
5. New Accounts Opened is “less influential”.

This breakdown is different from the formula used by FICO, and explains why VantageScore and FICO may generate different scores.

What Does Not Affect Your Credit Score?

There are a number of items that do not have any impact on your credit score.

• Race, color, religion, national origin, gender, or marital status. Federal law prohibits the use of any of these factors in determining credit status.
• Occupation, salary, or employment history. Lenders will evaluate this information, but they won’t get it from your credit report.
• Your age. Neither FICO nor VantageScore considers your age as a factor in your credit score.
• Tax liens, alimony, and child support obligations. Lenders may find these through a public records search, but they do not appear on credit reports.
• Participation in credit counseling. Credit counseling agencies don’t report to the credit bureaus, so participation in credit counseling or a debt management plan will not appear on your credit report.

Your credit score is about how well you handle debt, not about how rich you are. A low-income person who makes every payment on time can have a higher credit score than a well-off individual who habitually misses payments.

Bottom Line

You should know how your credit score is calculated because that knowledge will help you improve and maintain your credit score. Understanding the variations in credit scores can help you plan your credit more effectively. If you ask which scoring model a lender uses before making an application for credit, you’ll have a better idea of what to expect!

The post Learn How Your Credit Score Is Calculated – 5 Key Factors appeared first on FinMasters.

FICO® and VantageScore Credit Score Ranges

Credit scores are provided by two major companies: FICO® and VantageScore. They calculate scores using slightly different formulas and group their scores in slightly different ranges.

Both FICO® and VantageScore divide credit scores into ranges that define general risk brackets. Lenders use these ranges to help them decide what credit terms to offer.

Did you know you have more than two credit scores? In fact, you have over 30 of them. Here’s a list of all types of credit scores you should know, along with their credit score ranges.

Excellent

The credit score range for “exceptional” borrowers is 800 to 850 for FICO®.

For VantageScore, a score of 781 to 850 will put you in the “excellent” credit score range.

Borrowers in this range will have no problem getting approved for loans or credit. You’ll receive the best lending terms offered, including the lowest interest rates and fees. If your credit score is exceptional, lenders roll out the red carpet!

Only 1.2% of Americans have an exceptional credit score of 850.

Very Good

If your FICO® score is between 740 and 799, you fall into the “very good” category.

VantageScore does not have a range with a “very good” designation.

Individuals who fall in this range often qualify for better interest rates on loans and credit cards, and will generally have an easier time with the lending process. 

Good

A score from 670 to 739 falls into FICO’s “good” category.

The VantageScore “good” range is 661 to 780.

If your score is within this range, you are close to the national average (the current FICO® average for Americans is 714). Lenders see a score in this range as an indication of an acceptable borrower and it will qualify you for most loans and credit cards. You may not receive the best available terms, and you’re likely to pay a higher interest rate than borrowers with very good or exceptional credit scores. You may not qualify for highly selective premium credit products.

Fair

FICO® scores that range from 580 to 669 fall into the “fair” range.

The VantageScore “fair” range is 601 to 660.

This range may disqualify borrowers from some loans. Some lenders may class borrowers in this range as subprime. Some lenders may not approve your application at all. If they do approve your application they may offer a higher interest rate than borrowers with better credit would get.

Poor

FICO® doesn’t have a “poor” classification, but VantageScore does. VantageScore rates a credit score between 500 and 600 as poor.

It will be difficult to get credit with a poor credit score. Lenders who do approve you will charge very high interest rates.

Very Poor 

A FICO® score between 300 and 570 is considered “very poor”.

This is often caused by bankruptcy or other major credit problems. Most lenders will not extend credit to applicants with scores in this range. If you’re applying for a credit card, your only option may be a secured credit card where you put down a deposit equal to the amount of the spending limit. Utilities will probably require a deposit.

No Credit

As many as 26 million Americans have no credit score and another 19.4 million have thin credit files.

Having no credit can be even more frustrating than having a low score, especially if you have no debts and your finances are in good order. If you don’t have a credit score, it’s probably because you have a “thin credit file,” which means you don’t have much credit history or activity. If you have no credit information on file or there is not enough information on your credit report to generate a score – you will have no credit score.

Some Lenders Use Their Own Ranges

Many lenders adopt the ranges used by FICO® and VantageScore. Others may develop their own classifications. Major lenders may use different ranges to classify potential borrowers by risk level. Many lenders publish their credit score ranges or provide them on request.

If you’re considering applying for a credit card or a significant loan, find out what score ranges the lenders you’re considering use. Check your score and see where you fit. Don’t just consider the minimum standard for approval. Check the ranges that the lender uses to determine interest rates.

Fitting into a higher range can get you significantly lower interest rates, and that can save you money.

Know Your Credit Score Range

The concept of credit score ranges may seem unfair at first glance.

If your FICO® score is 660 you may wonder why you get offered the same loan terms as a borrower with a score of 590 but less attractive terms than a borrower with a score of 670. Some lenders will adjust terms according to your position within a range, but in many cases, the range defines the terms you are offered, fair or not.

If your score falls at the upper end of a lender’s range, ask whether they will give you a break and put you in the higher range.

They may agree, especially if your financial record is generally good. If they won’t, look into other comparable lenders. You may find one that breaks up their score ranges in a way that’s more favorable to you.

If you don’t find a lender that will fit you in a higher range, consider waiting and trying to improve your credit score. A little time and effort could save you real money, and once you start working on building your score you can keep on building it and move into an even higher range.

It is possible to build better credit. If you understand how credit scores are calculated and take a few simple steps, you can improve your credit score. You can rebuild a damaged credit score or start one if you haven’t got one. You may have to wait a bit for that loan or credit card, but you may be doing yourself a big favor!

The post Credit Score Ranges: What They Mean and Why They Matter appeared first on FinMasters.

Average Credit Score to Rent Apartments

The exact credit score required for a particular apartment is at the landlord’s discretion, but there is no industry standard. The average U.S. renter’s credit score was 638 in 2020, according to a study performed by the apartment industry blog RENTCafe^[1].

That same study found that the average credit score needed to rent an apartment varied based on the price of the apartment building itself. The data in 2020 showed three minimum scores:

• High-Priced Buildings: 669
• Mid-Range Buildings: 626
• Low-Cost Apartments: 597

Required credit scores will also vary based on geographic location, with urban apartments costing more than buildings in suburban or rural areas. Regardless, these numbers reflect the scores of today’s renters, so they may help you establish a ballpark range for understanding your rental prospects.

Minimum Credit Score for Renting Apartments

The good news is that there’s no minimum credit score to rent apartments. Since there’s no industry standard, landlords won’t always set strict limits on their renters’ credit history. In fact, some landlords, especially owners of smaller properties, may not even look at your credit score at all.

For instance, some landlords may prefer to evaluate your credit history instead of your final credit score. The difference lies in the fact that your credit score is a single, arbitrary number, whereas your credit history reflects the actual full record of your bill payments and other financial data. Many landlords will place more weight on your credit history than they will on your current credit score.

All of that is, of course, if your landlord chooses to perform a credit check at all. The owners of smaller apartments may simply ask a few basic questions about your finances, roommates, and pets. As long as your references check out, your rental application may be approved.

Credit Checks and the Tenant Screening Process

As of 2022, 15% of American household renters were behind on their rent payments^[2]. Some of these renters have undoubtedly been struggling, given the costs of inflation, but others have simply been delinquent in their payments.

Regardless of the reason, late or missed rent payments represent lost revenue for landlords. That means they must therefore screen their tenants to ensure they’ll take proper care of the property and that they already have a history of making on-time payments. Alongside personal references and a potential credit check, renters can expect to answer questions such as the following:

• How long have you lived at your current residence?
• Have you ever been evicted?
• Do you have any pets?
• Are you a smoker?
• Where do you work?
• What is your monthly income?
• Do you intend to have roommates?
• Do you have a relevant criminal history?

While no screening process is foolproof, landlords generally use systems like these to ensure that their tenants can make reliable and timely rent payments.

What Is a Rental Credit Check?

While there’s no minimum credit score to get an apartment, a low credit score can cause your landlord to consider you with greater scrutiny and therefore look at other economic factors, such as:

• Your debt-to-income ratio (your monthly debts divided by your monthly income)
• Bankruptcy history
• Defaults on loans
• Delinquent accounts
• Charge-offs (instances in which a creditor closed your account due to unpaid debt)
• Property repossessions
• Foreclosures

Landlords aren’t likely to worry much about high credit card balances, but if your credit history contains things such as foreclosures or bankruptcy, they could affect your eligibility for an apartment.

Will Evictions Show Up on My Credit Report?

Your credit report will not always include information about evictions or your history of paying rent. The only way for rent payments to appear on your credit report is if your previous landlord submits that kind of data to a rent reporting service. Missed rent payments, bounced checks, and even property damage won’t typically be reflected on your credit report.

However, landlords can obtain something called a “rental history report,” a document that can come through services such as Experian RentBureau that includes a more detailed history of your rent payments, broken leases, and other crucial details.

Apartments: An Important Stepping Stone

Renting an apartment can be a big step in securing housing for you and your family. It can also be a transition step between your current residence and future home ownership. Strong credit can improve your eligibility for an apartment, but you can secure an affordable apartment even if you have imperfect credit.

The post What Credit Score Do I Need to Rent an Apartment? appeared first on FinMasters.

All of this is free, and you don’t need to be a Chase customer. Let’s look at some of the pros and cons of this service.

What Is Chase Credit Journey?

Chase Credit Journey was started in 2017 to provide credit scores, credit monitoring, and other services for free.

The model is similar to Credit Sesame, Nerd Wallet, or Credit Karma. All of them provide members with weekly updated credit scores, alerts, and credit education articles.

The site feels like a budget version of sites like Credit Sesame, Nerd Wallet, or Credit Karma. It offers some free but limited credit monitoring services, and the credit education section does a thorough job covering the basics.

I think when large lenders attempt to educate on credit building, they are constrained because they are much more vulnerable to lawsuits for ambiguous advice.

This makes their articles and advice read ‘by the book’ and feel a bit like you are reading a textbook. The information is there, but getting it isn’t entertaining!

What Does It Cost?

My membership was free, and I had free access to all of the services once I joined and logged in.

The member dashboard does not attempt to sell anything or push any products upon you. In fact, if you want to shop for a credit card, personal loan, or mortgage, you will need to go to the ‘Offer’ tab in the Chase dashboard.

You’ll only spend if you elect to take them up on one of their credit card, personal loan, or mortgage offers. Otherwise, it is free.

Is Chase Credit Journey Safe?

When you enroll, you are giving Chase access to your credit records and score which, if ever breached, could be used to steal your identity.

Chase confirms your identity either with a one-time Security PIN sent to your phone number or through a series of questions based on the account and personal information in your credit report. If your phone number can’t be verified, you’ll be asked to answer the questions.

According to the FAQs, a multiple-step identification process is used to confirm your identity and keep your information safe.

The questions are based on the information found in your credit report and are presented in multiple-choice form.

You must answer multiple questions correctly to confirm your identity and if you are unable to, you will be given an alternate option for identification.

If you are still unable to confirm your identity after these attempts, you can contact Experian customer service representatives Monday through Friday, from 8 am to 9 pm (Est) at 1-844-343-5929.

Once you speak with Experian and confirm your identity, you will be given access to your account for free.

How to Use Chase Credit Journey

If you are new to Chase Bank Credit Journey, you can become a member for free by enrolling here.

After enrolling, you can go to the login page by clicking here.

The dashboard displays your Experian VantageScore 3.0 score when you log in.

The dashboard also provides a snapshot of the key factors affecting your credit, including; Late Payments, Oldest Account, Credit Usage, Hard Inquiries, Total Balances, and Available Credit.

You will also have access to a credit report alerts section when you sign in to your account.

The alerts will show any changes, additions, corrections, or deletions on your Experian credit report.

You also will be able to look at Chase Credit Journey offers of credit cards, personal loans, and mortgages.

One of the nicest features of Chase Credit Journey is the Experian limited credit report.

This report is pretty inclusive, especially since it is free. It includes most of the financial information Experian has collected about you and is used to determine your credit score.

Be sure to take a good look at the information and make sure that everything is correct.

Chase Credit Journey lets you view and manage information from your Experian credit report. Most of their competitors don’t have this feature.

If you find a record that has any mistake on it, you can request to have it verified.

If the lender or furnisher of the information is unable to verify the record, then the credit agency will delete it from your account.

For more information on the dispute process, check out our guide to how to dispute a credit report entry.

The Drawbacks

It’s hard to complain about a free service, but there are some things you should consider about Chase Credit Journey.

• The free credit score is a VantageScore 3.0. Most free credit score providers use VantageScore, but most lenders will use FICO. The score you’re seeing may not be the score a lender is seeing, and they could be different.
• You only see information from your Experian credit report. That will not tell you what’s going on with your credit reports from TransUnion and Equifax.

Those issues are not major concerns that should deter you from using the service. You’ll just need to be aware that you have two other credit reports to monitor and that the credit score you’re seeing isn’t the only one you have.

You can pick up some of this information from other sources. Look up how to get a free credit score and how to get a free credit report.

Check with each of your credit cards and even your bank to see if they offer free FICO credit scores or monitoring services. Many financial products now offer this service.

Take Action!

Overall, Chase Credit Journey has been a helpful tool, however limited. Because it’s free, I don’t worry too much about the limitations. It’s easy to use, and it provides a quick snapshot of your credit health. If you know what you aren’t seeing, you can fill in the gaps.

The free tools and the credit education section are useful and worth a close look.

If you don’t want to worry and stress over whether the free credit score Chase will match your lender’s score, look for ways to get a free FICO score.

Many credit cards and bank accounts will provide FICO score access. If you don’t have an account that provides FICO scores, consider MyFico for your credit score and monitoring services. It’s not free, but it’s comprehensive: you’ll see all of your major FICO scores from all three credit bureaus.

The post Chase Credit Journey Review: Free Credit Score and More! appeared first on FinMasters.

Here is everything you need to know to optimize this critical part of your credit score.

In this post:

• How Do You Calculate Credit Utilization Ratio?
• What Is a Good Credit Utilization Ratio?
• How Does Credit Utilization Affect Your Credit Score?
• When Is Credit Utilization Calculated?
• Ways to Improve  Your Credit Utilization Ratio
• FAQs

How Do You Calculate Credit Utilization Ratio?

Credit utilization is based on revolving credit: credit cards and other short-term lines of credit that are not paid on a set schedule. It does not include mortgages, student loans, or auto loans which are considered long-term installment loans. Revolving credit carries over month to month without a predetermined payment date. 

A revolving credit account usually has a credit limit. That is the maximum amount you can charge on the account. The percentage of that limit that you use is an indication of financial responsibility.

If you are using a low percentage of your credit limit, you are demonstrating responsible use of funds. If you max out your cards, you’re demonstrating the opposite.

There is a simple formula: Divide your total debt on revolving credit by your total available credit limit on your revolving accounts. 

Total Debt / Total Credit = Credit Utilization Ratio

Use the Calculator

Here is an easy way to do the calculation. This calculator will do it for you! You can check the calculator regularly to see your credit utilization rate improve as you pay off credit cards and other revolving credit debts. 

Here’s the calculator:

Go to the full page to view and use the calculator.

A better credit utilization rate will have a significant impact on your overall credit score. Unlike the other factors in your credit score, improvements will have a positive impact on your credit score within one billing cycle. A higher rate can also push your credit down in one billing cycle.

What Is a Good Credit Utilization Ratio?

Aim to keep your balances under 30% of your total available credit. This will keep you firmly in the “good” category. Regularly paying credit cards on time will improve your ratio (and reduce your interest payments).

What Is Credit Utilization, How It's Calculated and How to Improve It

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Research from Experian shows that users with good credit scores (740 to 799) have an average credit utilization of 12.47%. Users with credit scores of 670 to 739 average 32.6%.^[1]

How Does Credit Utilization Affect Your Credit Score?

Your credit score is made up of a number of factors, including credit utilization rate, payment history, inquiries, public records, credit history, and credit mix. Your credit utilization ratio makes up around 30% of your total credit score. Even with perfect payment history, long credit history, and a good credit mix, your credit score could be reduced by a high ratio. 

A credit utilization rate under 30% is acceptable. Under 10% is good, and under 5% is excellent.

A credit utilization under 30% will not have a negative impact on your credit score. 

This ratio is calculated for each individual credit card or line of credit and as a total. That means that the rate on each credit line or credit card can affect your score. Even if your overall utilization is low, one maxed-out card can harm your credit.

When Is Credit Utilization Calculated?

Credit card companies usually report to credit bureaus once a month, or once during every 30-day billing cycle. This usually happens about 7 to 15 days after the statement closing date, but that varies with the card issuer. 

Payments made or changes to total credit are reflected in 30 to 60 days. If you have paid off a significant portion of debt on revolving credit, expect to see it in your credit score in about a month, depending on when the institution reports and when the credit score is updated.  

If you have a high balance on a card at the time the card company reports, you could see your ratio spike even if you pay that balance in full on or before the due date.
You can avoid this by keeping your balances low or by making several payments each month.

Ways to Improve  Your Credit Utilization Ratio

There are five ways to lower your credit utilization.:

1. Pay off debt
2. Redistribute debt
3. Open a new line of credit
4. Ask for a credit limit increase.
5. Keep old cards open.

Here is how to use each of these.

1. Pay off Debt

Paying off debt is the simplest and most effective way to improve. In addition to paying off credit card debt, focus on paying off any other revolving lines of credit like store loans or layaways. 

2. Redistribute Debt

If it is not possible to pay off debt in the short term, another strategy is to redistribute debt. You can do this by transferring a balance to a different credit card. Ideally, aim to have no single card with more than 30% of total available credit. That means if the credit card has a line of credit of $10,000, try to put not more than $3000 on it. 

Make a strategy before you add expenses or additional debt. If you have to make a charge you won’t be able to pay off right away, try to put it on a credit card or line of credit that does not already have 30% of total available credit in debt.

3. Open a New Line of Credit

When you open a new line of credit, such as a credit card, you get two advantages. First, it increases the total available credit. Second, many credit cards offer 0% interest for a set period of time after opening. This is typically three months to a year. This gives you an opportunity to make a balance transfer, improve your credit utilization rate, and avoid interest while paying off debt. 

Opening too many lines of credit in a short space of time can hurt your credit score. But, if you haven’t opened a credit card for some time, this is an effective strategy. 

4. Ask for a Credit Limit Increase

One of the fastest ways to lower your credit utilization is to ask your card issuer to increase your credit limit. Many card issuers are willing to add a bit to your limit, especially if your payment record is good.

If you had a card with a $5000 limit and your balance was $2000, your ratio would be 40%, not so good. If your card issuer increased your credit limit to $8000, the same balance would give you a rate of 25%, much better.

You’ll need to resist the temptation to spend more with that higher limit. That won’t help!

5. Keep Old Accounts Open

If you have old credit cards you aren’t using, don’t close them. They will add to the average length of your credit history, and their credit limits will add to your total and help your credit utilization.

The only exception to this rule would be cards with an annual fee. If you’re paying to keep a card that you aren’t using it might not be worth the benefits you gain.

Learn More: The 15/3 credit card payment method can help you keep your credit utilization where you need it to be. Check out our guide to the strategy here: The 15/3 Credit Card Payment Hack: How, Why, and When It Works.

FAQs

The Bottom Line

Credit utilization is a key part of your credit score. It’s also a part of your credit score that you can control and change. If you’re looking to improve your credit score, lowering your credit utilization rate is one of the most effective ways to do it.

The post What Is Credit Utilization, How It’s Calculated and How to Improve It appeared first on FinMasters.

With the strategies we have outlined in this article, and a little bit of patience on your end, you can increase your credit score by 100 points or even more.

In this post:

• 5 Ways to Improve Your Credit Score
• How Long Does It Take to Improve Your Credit Score?
• Fastest Ways to Improve Your Credit Score
• How to Improve Your Credit Score In 30 to 60 Days
• How to Improve Your Credit Score in a Year

5 Ways to Improve Your Credit Score

There are 5 main factors that make up your credit score. Each of these factors can be used to improve your credit score.

1. Payment History – timely payments
2. Amounts Owed – your current debt and available credit
3. Credit History – how long you’re using credit
4. Credit Mix – how many types of credit you own
5. New Credit – how many new credit requests you have made recently

1. Payment History

The single most important way to improve your credit score is by paying your credit cards, installment loans, and any other credit line on time. The key is consistency.

Since on-time payments account for 35% of your credit score, this is one of the easiest ways to improve your credit score. 

In the case of credit cards, you only need to make the minimum payments for them to be counted as on-time payments and have a positive effect.

Payments that are more than 30 days late are usually reported to credit bureaus. To avoid late payments, you can set up automatic payments of the minimum payment amount on each of your credit cards, as long as you are careful not to overdraft from your bank account. 

An extended history of on-time payments is one of the most effective ways to build your credit score. 

2. Amounts Owed

After payment history, the amounts you owe will have the biggest impact on your credit score. The amount owed accounts for 30% of your credit score.

Lenders measure this not just as the total debt, but also by the credit utilization ratio. This is the amount of your total revolving credit limit that you are using. 

Keep your credit utilization ratio below 30%. That means if you have a total credit limit of $10,000 on your credit cards, you will want to avoid carrying more than $3000 in debt.

People with credit scores of 795 and above use an average of only 7% of their available credit.

There are several ways to lower your credit utilization ratio:

• Pay off debt. The lower your balances are, the lower your credit utilization will be.
• Ask for a credit limit increase. A higher limit means lower utilization.
• Redistribute debt. Using an installment loan to consolidate your credit card debt will drop your credit utilization and could lower your interest rate.
• Open a new line of credit. A new credit card will add to your limit and reduce your credit utilization.
• Keep old cards open. Unless they carry an annual fee, it’s a good idea to keep those old cards. Their credit limits add to your total limit and lower your utilization.

Remember that both your total utilization and your per-card utilization matter. Try not to bring the balance on any card above 30%. Lower is better!

3. Credit History

While you cannot retroactively open a credit card or line of credit to improve your credit history, you can become an authorized user on someone else’s card.

If you want to increase your credit history length, which makes up 15% of your credit score, the best way to do this is by being added as an authorized user by someone you know with a good credit score. You can do this for a temporary boost, such as when applying for a mortgage, or long-term for a sustained credit boost.  

If you have a friend or relative with good credit history willing to add you to their oldest credit card, the additional time of good credit will give your credit score a boost.

But how do you ask your friend, parent, or family member and get them to say yes? Watch the video below to see the 5 easy steps you can take when asking your friend, mom, dad, or other relative and get them to add you as an authorized user.

You can also maintain your credit history by keeping old accounts open. Don’t close old credit cards unless they have an annual fee!

While some people will attempt to do the same through buying tradelines, we don’t recommend it.

4. Credit Mix

Your credit mix takes into account the different lines of credit. A good credit mix includes both revolving lines of credit, like credit cards, and installment loans, like student loans, auto loans, and mortgages. 

To improve your credit mix, consider what you already have.

If you only have credit cards, getting even a small installment loan, such as a credit builder loan, can improve your credit mix.

We’ve reviewed 5 of the best credit builder loans, and if you’re considering taking out a credit builder loan we recommend you check out Self or Credit Strong.

If you only have installment loans like student loans or auto loans, adding a credit card or store line of credit will improve your credit mix. 

Since credit mix makes up only 10% of your credit score, this is not the most important factor to consider. But if you’ve already improved the other areas, this is a way to further boost your score. Every bit counts.

5. New Credit

Opening a new credit card is one strategy to improve your credit score, but only if you do it strategically. Too many new accounts or hard inquiries can hurt your credit score.

Avoid opening more than two to three accounts per year to avoid being penalized, and try to spread them out. 

Once you have an account open, try to keep it open even if you do not use the card. This will increase your total available credit and improve your credit utilization ratio.

How Long Does It Take to Improve Your Credit Score?

How long it takes to improve your credit score depends on your individual credit history and situation. Many people can see improvement in as little as a month. 

The time it takes to change your credit score is heavily affected by the amount of information in your credit file. If you have a thin credit file with a small number of accounts, any change, even a small one, will have a noticeable impact. If you have many accounts and a long credit history it will take more time and effort to change your score.

Research from FICO shows that it can take 3 months for credit to return to its previous level after closing a credit card account, maxing out a credit card, or applying for a new credit card. Late mortgage payments can affect credit scores for 9 months, while missed or defaulted payments can decrease credit scores for 18 months. 

If you’ve had any of these situations, you can expect your credit score to gradually increase over 3 to 18 months. 

Fastest Ways to Improve Your Credit Score

If you’re looking for an immediate boost to your credit score, you have a few options:

1. Pay off credit card debts
2. Pay installment debt on time
3. Be added as an authorized user
4. Ask for a higher credit limit
5. Get credit for what you pay
6. Dispute inaccurate information on your credit report

1. Pay Off Credit Card Debt

Paying off any credit card balances is good for both your credit and your finances. Your credit utilization will drop and you won’t be paying interest!

2. Keep Up With Installment Debt

There’s generally no advantage to your credit in paying off installment loans early. A loan that’s paid will still be on your credit record, but active accounts have more impact than paid accounts.

You want to be sure to make every payment on time, but keeping that live installment loan on your record will help your credit more than paying it off early.

3. Become an Authorized User

If you are added as an authorized user to someone with good credit and a longer credit history, you can get an instant credit score boost.

If you have a credit history of 10 years, and a friend has a credit history of 20 years and a higher overall credit score, being added to one of their cards will double your credit history length, instantly improving your credit score. 

4. Ask for a Higher Credit Limit

Asking for a higher credit limit can improve your credit score quickly. If your credit card has a limit of $5000, ask for an increase to $7000 or $8000. This can instantly reduce your credit utilization ratio and increase your credit score.

Explore how to increase your credit limit, and the most important things to consider before you do. 

5. Get Credit for What You Pay

Another way to build credit is to have payments you make on a regular basis added to your credit profile. You may be able to get regular expenses like your mobile phone bill, rent, and utilities included in your credit report. You have to pay them anyway, so you might as well gain from them. 

Experian BOOST and TransUnion’s eCredable Lift can help you improve your credit score by giving you credit for paying utilities and other bills on time.

Grow Credit places streaming service bills on your credit report.

If you rent your house or apartment you can get a big credit score boost by reporting your rent. Companies like Boom and Rent Reporters will report your rent to the credit bureaus.

We’ve reviewed 12 of the best rent reporting services, and if you’re considering rent reporting the review is a great place to start.

6. Dispute Inaccurate Information on Your Credit Report

Be alert to get your free credit reports from Experian, Transunion, and Equifax. Learn how to read a credit report. If you spot any incorrect or inaccurate information, use the dispute process to have them removed.

Knowing your credit reports will help you know how much work you have to do to improve your credit.

If you have legitimate late payments, chargeoffs, or collection accounts on your record you can help by paying the accounts off, but they will remain on your record for seven years from the date of the first delinquency. That sounds like a long time, but older accounts affect your credit score less than newer ones, so the impact of those old black marks will fade as time goes by.

What Not to Do

Many people who are eager to improve their credit embrace methods that are risky or ineffective. Some even fall victim to credit repair or debt relief scams.

If anyone promises that they can improve your score instantly or remove legitimate items from your credit report, be careful. It’s easy to make promises but hard to deliver on them, and you may end up spending money for nothing.

There are legitimate credit repair companies but also many that are less legitimate. do your research carefully before hiring someone to improve your credit, purchasing tradelines from someone else, or using other shortcuts.

In general, it’s not a good idea to spend money to improve your credit score. If you open a new credit line, only use it to buy things that you need and would have bought anyway. If you get a new credit card or keep an old one just to help your credit, be sure you’re not paying annual fees for those cards. Getting a credit line at an online store that sells overpriced goods is a poor way to build credit.

You want your spending to work for you, not against you!

How To Improve Your Credit Score In 30 to 60 Days

The best way to improve your credit score in 30 days is to use the strategies to instantly improve your credit score. Your 30 to 60-day credit score boosting checklist:

• Debt: Pay off as much credit card debt as possible. If not all, try to get the credit utilization ratio below 30%, lower if possible. Make installment loan payments on time.
• Credit Limit: Ask for a higher credit limit with each of your credit card companies.
• Credit History: If you know someone, like an older relative, with good credit history, ask to be added as an authorized user. 
• Get Credit For What You Pay For: You can boost your credit by reporting your utility, rent, and even streaming service bills. 
• New Credit: If you haven’t opened a new line of credit in at least 3 months, opening a new line of credit will increase your total credit limit and can increase your credit score. 

Be sure to make all payments on time and focus on paying off as much debt as possible. These strategies together will show a boost in your credit score in 30 to 60 days. 

How to Improve Your Credit Score in a Year

If you have a year to improve your credit score, first follow all the strategies we recommended for increasing your credit score in 30 to 60 days.

Here’s what else you can do to increase your credit score in a year:

• With a year to plan, you can open two new credit cards in the first 6 months of the year to increase your total available credit.
• Diversify your credit mix. Try to have at least one revolving line of credit, like a credit card, and one installment loan, like an auto loan, student loan, or credit builder loan.  
• Finally, near the end of the year, after paying on time and decreasing debt throughout the year, you can request an increased credit limit again.

Be sure to make all payments on time!

FAQ

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• Really free. Free means free, not “we’ll get your credit card details and start charging you in a month unless you cancel”.
• No strings attached. Some people sign up for a free credit score and find themselves buried in spam email offers. You don’t need that.
• No personal information requests. You don’t want to turn over your email address or phone number, and you definitely don’t want to hand out your Social Security Number.
• No hard credit check. A hard pull on your credit can hit your credit score.

Before you choose a way to get a free credit score, remember that you have many credit scores. Many free credit score providers use VantageScore, but most lenders use FICO. Both FICO and VantageScore offer several different scores.

VantageScore will help you track your finances, but if you want to know if you qualify for a loan or credit card you may prefer a FICO score, which is probably the score that your lender will use.

Where to Get a FREE Credit Score

There are several ways to get a truly free credit score.

Your Credit Card Company

Most places want to collect your personal information to give you a free credit score.  But why do that if you already have a credit card that will give you the score for free? Many credit card issuers will give you a free credit score as a card perk.

If you have a credit card, there’s a good chance you can get a free credit score. Log in to your card’s member site and check the sidebar and main menu dropdowns.

You’ll find that in many cases when you log in, your card does offer a free score.

For example:

Here’s a sample login page, with the free credit score option highlighted.

American Express

Everyone knows who American Express is, but you probably didn’t know they offer two ways to get a free credit score. 

If you are on the above landing page, then you are signing up for their new free credit score platform. 

This isn’t only for cardholders. It is open for everyone, but you will have to provide an email address and personal information.

This product does not offer you a FICO score. It is a Vantage Score from Transunion. If you have an American Express credit card, you can get a FICO score for free.

Citi

In order to obtain your FICO score with Citi you must be a cardholder.

There is also a possibility that the credit card you apply for won’t have the free FICO score benefit. If you are shopping for a Citi card, check the terms and find out.

Here’s what Citi says about their free credit score service.

As you can see, you will be getting your FICO Bankcard Score 8 from Equifax. FICO 8 is the most commonly used FICO score, so it’s a good score to have.

Discover

If you have a credit card from Discover you can view your credit score with no charge and no hard pull on your credit. All you have to do is log into your account and view your credit scorecard.

You also will have access to credit alerts. This is a new feature they are offering with their free credit score. This is a neat benefit, and Discover gives it to you for free.

Other credit card companies have similar offers. Most are focused on current cardholders. Check your credit card’s online portal for details.

With ID Theft Protection

If you have identity theft protection you may be able to view your credit score through your identity theft protection provider. Identity theft protection is usually a paid service, but if you have it you should use all the available features.

Eliminate ID Theft

Here’s an identity theft protection service that provides credit scores along with its other services.

As you can see from the above image, there’s an assortment of features, including:

• Identity & Credit Restoration Support
• Training Videos To Help You Fight Identity Theft
• $25,000 In Reimbursement Insurance
• Credit Monitoring

It also includes a credit report and credit score from each of the three major credit reporting agencies. You get access to all of the scores, the reports, and the monitoring.

Whenever there is an update on your credit report you get an email alert letting you know about the changes. You can also add your spouse to the plan for a small additional fee

Eliminate ID Theft is the not the only company offering this option. If you have been considering identity theft protection then you should be looking to see what additional benefits the company offers such as free credit reports, free credit monitoring or free credit scores.

Through Your Bank

Many banks will provide you with a free credit score. You get to avoid giving out any personal information and still get your credit score for free each month.

Here are a few banks that offer this benefit.

Wells Fargo

Wells Fargo has been run through the mud in the news these last few years for tons of scandals. I don’t know if offering a free FICO score is their way of trying to make up for the past, but it is an awesome benefit if you bank with them.

You don’t have to have a credit card to get access to this score. You just need to be a customer of the bank and join their Wells Fargo Online system.

Wells Fargo offers the newer FICO 9 score. Many lenders still use FICO 8, and there could be some differences.

First National Bank Of Omaha

The First National Bank Of Omaha is the largest privately held bank in the United States, with over $17 Billion in assets. Many people still haven’t heard of them.

If you become a First National Bank Of Omaha customer, you get access to your FICO Score 8. This is the score that is currently being used by most lenders and will probably match the same score a lender uses.

To get your score, you can either log into your online account or access from the mobile app.

Each of these banks gives you access to your FICO Score. You don’t have to pay for it. 

Third Party Sites

Unless you have been under a rock or off the grid, you know you can get a score from third-party sites. Their ads are everywhere and they are widely discussed online.

But here’s the thing: 

While getting your score may be free, you still have to sign up for an account and give your personal information.

Credit Karma

Third-party vendors have come out of the box swinging, offering free credit scores and reports and many other features.

One of the first I can remember was Credit Karma. When they first appeared I thought it was amazing that they would give you a free credit score.

Now that I know how it all works, there are some things to consider. 

Once you get your report and score, Credit Karma will recommend credit cards and loans based on your current credit profile. If you use one of those recommendations they get paid by any bank or lender you sign up with based on Credit Karma’s recommendation.

Most third-party vendors use this model. Their goal is to put you into their system by giving you free access to a credit report and score with the hopes of you using one of their recommended services. 

Credit Sesame

A third option is Credit Sesame 100% Free Credit Score & Credit Monitoring.

Like the other companies, there is no credit check required and of course, you can’t hurt your score when you personally check your credit. Credit Sesame also boasts more features.

Like the other two companies, they will recommend loans, credit cards and bank accounts based on your current credit profile. 

Just like the others, Credit Sesame will give you a VantageScore from TransUnion. 

NerdWallet

NerdWallet is the most recent entrant into the free credit score space. Unlike Credit Karma and Credit Sesame, they didn’t start out with this feature.  They primarily did reviews and “best of” posts and have grown into this model.

You look at your credit score online, and you also have access to the NerdWallet mobile app. The app allows you to see all of the factors that are making up your current credit score by color-coding each section. If you have a ton of red on your report, your score will probably be low. Green is a good sign. 

That feature gives you not just a look at your credit score, but at what’s helping and hurting it. That can help you build a plan to improve your score.

The only true downside is that NerdWallet gives you the VantageScore 3.0 through Transunion and not a FICO score.

After Getting Declined For Credit

If you are declined for credit you will usually get a letter telling you why you were declined. While this method is probably the least talked about, it can give the most realistic picture of where you stand with your credit. 

The letter usually tells you a few things.

Which Credit Bureau was Used

It is essential to know which credit reporting agency has pulled your credit. Sometimes one of your reports is stronger than the others.You will usually see this happen when a creditor doesn’t report your account to all of the credit reporting agencies. 

If your Transunion report has a better profile than your Equifax report then it is best to apply for companies that only use TransUnion until your score is better. 

As you can see above this report was pulled from Experian, and you are given their address, phone number and web address to contact them.

And while the letter says the decision was “based in whole or in part”, your credit report is the main or often the only factor in making the decision.

What Is Your FICO Score

Depending on where you applied for credit, you might receive your decline letter either online or in the mail. 

You will usually find your FICO score information in the Credit Score Disclosure section like in the image shown below:

You will be able to see the actual FICO score that was used when they pulled your credit.

It might be odd seeing that someone was declined for credit with a 727 credit score, but it is important to keep in mind that your score is only a part of the equation.

What Factors Caused You To Get Declined

If you have been declined for credit, it isn’t only your credit score that you have to consider but your actual credit report.

Your credit score alone isn’t enough to get you approved for a loan or credit, it is also going to depend on what is on your physical report. 

Do you have collections or charge offs? Do you have any late payments?

As you see, the person looking to borrow credit has a few issues. First, their credit utilization is too high. They also don’t have enough credit history so they could have a thin credit file and they also have a short average age of accounts.

Applying for a credit card knowing that you will be declined might sound wacky, but the truth is that the information you gain from getting a decline is often better than getting approved. Just remember that the application will generate a hard inquiry, which can put a minor dent in your credit.

If you apply for one credit card that will almost certainly approve you and another that won’t, you can get a decline letter without damage to your credit. As long as the applications are within a 15-day period the credit bureaus will read them as shopping for the best deal and will record only a single hard inquiry.

Checking Your Credit Daily

Some companies allow you to get a daily credit report and score.

What does getting a free credit score have to do with checking your credit every day?The biggest drawback to most free credit score providers is that you can only check them once a week or once a month.

If you want a free credit score, it is probably because you are doing something with it.

When you are actively trying to establish or rebuild your credit you want to know what’s happening at all times and having a product that allows you to check your report and score daily is essential.

A Daily Score: My Privacy Matters

My Privacy Matters is one of the few companies that gives you a fresh credit report and score each day.

Some people might think that obtaining your credit report and score on a daily basis is overkill. Sometimes, though, it might be just what you need.

Sometimes you are waiting for a payment to be reported so that you can see how it affected your score.

You might be waiting to apply for a new mortgage or car loan and need to make sure a collection you paid to have deleted has actually been removed from your credit.

Once you have logged into your account you can access several categories: 

• Your Credit Reports
• Credit Monitoring
• Recovery Assistance Help
• Identity Theft

Clicking on the reports button takes you to the below section of the site to start viewing your report and score: 

Once you are on this screen you get to decide if you will be logging in or if you are a returning spouse and want to log in.

There is a small catch with this process: you have to wait exactly 24 hours before you pull your new report. If you pulled it yesterday at 1:30 pm, you have to pull it today no earlier than 1:31 pm or you will get an error and have to wait an entire day before you can do another update.

Checking your credit daily is a smart move and can teach you the reporting patterns of your creditors and how the credit reporting agencies report your information.

It’s Up to You

Now it’s your turn to take action.

Now you know what to do to get a free credit score. That’s just the start! Keep boosting your knowledge by learning how your credit score is calculated, what credit score ranges are, and what credit score you need to achieve your financial goals!

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