Are you thinking of buying a house, or a car? Do you want to save money when you borrow for these big things? Do you dream of traveling with the points from that amazing credit card you have heard of?
Then it is time to start to raise your credit score now, so you can easily get lenders to loan you money.
The thing is, raising your score is easy. At least the steps to do so are easy. It is the habits and actions that allow you to execute those steps that are hard.
So, what is credit anyway?
If I asked you what your score is, do you know it? Where did you find that answer?
Do you think it is the same score that a lender would look at to determine if they will loan you money and at what interest rate?
Let’s dive into this topic.
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Credit scores are widely available
Most of us today can say that we know our credit score. It used to be something that was more elusive. We would only find out our score if we paid for it or if we applied for a loan.
Now, banks show us a score, some credit card companies show us a score, and there are several apps that give you your score just for signing up.
Are these the scores that a lender will look at?
The answer to that is sometimes. It really depends on what score you are viewing at these free sources.
USAA and Navy Federal Bank used to show their customers a Vantage Score and even use them for their own lending. If you were applying with these banks then seeing that score was helpful for their loans, however, it isn’t usually the score that an auto company would see if they were looking to lend you money to buy a car on their lot.
Most auto lending companies look at one of your FICO scores. Recently both USAA and Navy Federal has switched over to showing their customers one of the FICO scores.
Most lenders purchase your score from FICO, then they use that score to determine if they will loan you money and the interest rate, they will give you.
Did you know you have more than one FICO score at any one time? Yes! Like 20-30 different FICO scores at any one time!
FICO Score is King
A FICO score is generated by an algorithm created by the company FICO or Fair, Isaac, and Company. The founders of the company began to create mathematical algorithms that could help lenders assess the risk of loaning a consumer money in the 1950s.
This is the score that most lenders still will pull to decide on a loan.
Others have tried to compete with FICO. Vantage was one that gained some momentum in recent years. It was even looking like they were going to take over the credit card world as the number one score that lenders used, but that didn’t last long.
FICO is still King and still the one to watch and get as high as you can IF you are preparing to apply for a loan. If you are not applying for a loan any time soon, then your score isn’t as relevant.
3 Things that Raise Your Credit Score
There are several factors that FICO includes when calculating your score, but the good news is there are three that makeup 80% of your score!
If you focus on the actions and habits that make up those three categories, then your score will rise and as fast as possible.
1. Payment History is 35% of your overall score.
This is paying on time, all the time. This means that you pay your loans when they are due, every. single. month. If the lender reports a 30-day late payment to FICO, then your score will drop. Immediately, anywhere from 50 to 100 points!
Yes, you read that correctly 50 to 100 points. And those of you that started high, those that reached those beautiful 800s will have the largest fall. You will be the ones that drop 100 points.
Will it go back up when you pay on time the next month?
Sad to say, but no.
However, the good news is, it will go up, little by little with every on-time payment you make after that one missed payment.
2. Utilization Rate is 30% of your overall score.
For this FICO is assessing how much of an overall balance are you are carrying from month to month on your revolving credit accounts.
Revolving credit is any credit where you have a limit, you can spend up to the limit, pay it off, then spend up to it again.
For the most part, this will be your credit cards. However, sometimes there are accounts that are revolving, even if they didn’t give you a physical card. The ones like this I see most often are furniture stores and jewelry stores. These are more like lines of credit at the store and unless you close them after paying off, you still have the open credit.
FICO wants to see less than 30% of your overall revolving credit being used. And even less than that is better. This will be over all your accounts, not each one separately.
It will save you money in interest charges as well as raise your credit score if you pay your cards off in full each month.
Maxing out a card and paying it off slowly will hurt your credit NOT help it. (It will also hurt your bank account with losses of paying hefty interest charges!)
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3. Credit History is 15% of your overall score.
This is how long you have had and maintained credit.
Simply put, the average age of credit accounts you have had, this number will go up as it counts the years your cards or other loans have been open.
This factor is where the idea that you shouldn’t ever close a credit card comes from.
I don’t entirely agree with this. I think you should be cautious about closing long term credit cards, but I wouldn’t keep open 10 store cards from when I was younger.
Just these three categories make up 80% of your overall credit score.
If you simply focus on these three, you will be sure to raise your credit score as high as possible, as fast as possible.
Pay all your loan bills on time every single month.
Reduce the amount of balance carried on your credit cards.
Maintain your long-term credit cards by keeping them open and using them once in a while.
This will raise your credit score.