It is 100% okay if you don’t know anything about your credit score and how it’s calculated. I certainly didn’t when I first started. Making the decision to learn and empower yourself is the important part. Credit scores are so confusing and how they are calculated can seem like a big secret, but today you will learn all of those secrets to be brilliant with your credit!
The first step is to know your credit score number. You can request a copy of your credit report directly from each of the credit bureaus. You are entitled to one free copy per year. However, I find this burdensome and limited. I personally like to check my credit report every month, and like everything else, I don’t want to have to pay for it. That’s why I use Credit Karma. You can Download the app HEREor HERE, or sign up on creditkarma.com. It is COMPLETELY FREE. They never ask you for payment information.
Remember that a credit score doesn’t measure whether you have NO debt. It measures whether you can responsibly manage debt OVER TIME. This is measured by6 main factors to your credit. We will discuss them one at a time.
1. Number of Hard Inquiries
Firstly, Hard Inquiries are when some has pulled your credit. This is usually when you apply for new credit, like a credit card, auto loan, home loan, etc. A hard inquiry shows on your credit for two years. Your goal is to have less than 3 on your credit score at a time. This means that you want to choose when and what credit you apply for VERY CAREFULLY. DO NOT keep applying for credit cards one after another until you get approved. Find out your approval odds BEFORE applying and THEN apply. You can do this through Credit Karma. They suggest cards and show you your approval odds.
2. Payment History
This is probably the most obvious one. If you have late payments, they will negatively hit your credit score HARD. Do everything you can to make your payments on time to avoid it hurting your credit score. Late payments can stay on your credit score for up to SEVEN YEARS. Don’t let a hardship haunt you for that long.
If you are unable to pay a bill on time, call your creditor ahead of time. They may be able to move the payment date or work something out with you. Everyone goes through hard times. They understand. It may be embarrassing, but short-term embarrassment now is better than long-term embarrassment later from bad credit. If that creditor is unable or unwilling to work with you, do everything you can to get it paid. If you have other bills due soon, try to see if one of those creditors will work something you with you so you can pay this one, and get an extension on another instead.
3. Derogatory Marks
Derogatory Marks are anything from collections to bankruptcy. These can stay on your credit score for 7-10 years, depending. These are separate from late payments. However, if you have a bill that is late and then ends up in collections, you will get hit negatively in both categories. This means that even one bad Derogatory Mark will hit your credit HARD. Derogatory Marks should be avoided at all costs.
Avoid collections by trying to work out a payment plan with anyone trying to collect a balance you cannot afford. They will many times take minimal monthly payments, as long as you are paying something and consistently. Bankruptcy can often be avoided by the same means. Look out for a new post soon discussing this topic more thoroughly.
4. Credit Card Utilization
Credit Card Utilization is probably the easiest one to manage. This factor considers the balance on your credit cards, divided by the amount of credit you have available on your credit cards. Your goal is to keep your utilization below 30%. Keep your balances low and pay your credit cards balances in full with every paycheck and this will be a breeze.
Keep track of your credit score and income. Each year, if anything has changed (credit score went up, income increased), apply for an increase in your credit limit on your current credit cards. They will not make a hard inquiry on your credit. The simply look at the new information, and your good payment history, and determine if you are eligible for an increase in your credit limit. This doesn’t mean you should spend more money with them! This is simply a tool for keeping your utilization low and increasing your credit score. (Check out this post about credit cards).
5. Credit Age
You Credit Age is the average age of all of your open accounts. This will likely remain “low” while you are trying to build your credit, but your long-term goal is 9 years. This obviously takes time! My average is only about 3 and a half years right so don’t worry if yours is also low for a while.
The key is to stagger your new credit. Don’t apply for a bunch of new credit at once. Apply for one (a new credit card, auto loan, etc), wait six months to a year and then apply for new credit (another credit card, a home equity loan, etc).
6. Total Accounts
Lastly, your Total Accounts is the total of both your closed and open accounts. Again, this is one that takes time to build up. Your long-term goal is 11 accounts. By working on your other factors, this one will occur naturally.
Finally, This is a lot of information and I know it can be overwhelming! Don’t worry! You are not alone. I often felt overwhelmed when I was first learning about credit scores too. You cannot build or change your credit score all at once. Work on one factor or couple of factors at a time, but keep in mind what other factors you may be affecting. Take things one at a time and you are on the right track to succeed brilliantly!
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