Today, we’re talking all about your credit score. We’re going to be talking about exactly how is it calculated and real ways that you can work on raising your credit score in a legit way (no scams allowed)!
My Introduction to the Credit Score
Back in college I avoided credit cards, which is super great because I LOVE to spend money. I could totally see myself racking up a ton of credit card debt had I had one. When I graduated, however, my mom told me me it was time to get a credit card to start working on my credit score.
I ended up applying for several cards only to be rejected. This is probably because number one, I had a lot of student loan debt. Number two, I had just landed my first teaching job and I wasn’t making a lot of money. And then number three, it was right after you know what hit the fan in 2008, so the economy really wasn’t in a great place. And so I continued to get rejected for credit cards. The only credit card I ended up getting approved for was an Express credit card for the store in the mall which had a $300 limit.
Here’s what my mom told me: “Okay, Allison, here’s what you’re going to do…you’re going to go to express once a month, and you’re going to buy one item. You’re going to then pay off the card in full every single month. And that’s going to help you build up your credit!”
She also told me I needed to pay my student loans on time whenever they came out of that grace period you get when you graduate college.
This was my introduction to what a credit score is and how to build it up.
Why Your Credit Score Matters
Let’s be honest here, your credit score matters. Here’s why:
Your credit score helps lenders know whether or not you’re going to be a good candidate for a loan. So whether you’re applying for credit cards, a house loan, a personal loan, or looking to purchase a car or refinance, your credit score is going to impact the interest rates that you get on these loans. My husband I refinanced our home last year and our credit scores played a huge factor in us being able to refinance from a 30 year mortgage to a 15 year mortgage while getting a low interest rate.
And if you’re a renter, your landlord might even look at your credit score to determine whether or not they want you as a renter.
Ultimately, your credit score is a three digit number that communicates a person’s credit worthiness. The higher your credit score, the better you appear to a lender, landlord or a credit card company. The lower your score, the riskier you appear.
What’s a good credit score?
Credit score ranges between 300 to 850 points, let’s break down those numbers into categories:
- An excellent score is going to be from 800 to 850
- A very good score is 740 to 799
- A good score is 670 to 739
- A fair score is 580 to 669
- A poor is 300 to 579
How is your credit score calculated?
Once we understand the key areas that factor into the calculation or our credit score, then we’re able to determine how we can impact each key area on a daily, weekly, or monthly basis to move the needle forward in improving your overall score.
Credit scores are calculated based on five main factors:
Your payment history
The greatest impact to your credit score is determined by whether or not you pay your bills on time. In fact, 35% of your credit score is calculated from your payment history. Payments can include anything from your mortgage payment to your utility bills. If you’re frequently late on your bill or debt payments, this is telling lenders, “hey, this person might not pay you on time!” And lenders don’t necessarily want to lend money to people who don’t pay their bills on time. If they do decide to lend, they’re going to tack on extra interest because lending to you is a risk!
Total amount owed
The next 30% of your credit score is the total amount you owe, this comes down to how much credit you’re offered, and how much of you’re actually using, which is what we like to call your credit utilization rate. So basically how much you owe versus how much you have available. So for example, let’s say that you have one credit card and has a limit of $10,000 on it. So you can borrow $10,000 on that credit card. And you Oh, you go, you go out somewhere and you buy a $2,000 Sofa. So you put $2,000 on the credit card, you now have a credit utilization rate of 20% 2000 divided by 10,000 times 100 gives you 20%, that credit utilization rate, the goal, what I would love to see in the Gulf that I have myself is to keep my credit utilization rate under 30%, which basically means, hey, you have access to all of this credit that you can use, but you’re not using it. In fact, you’re using only less than 30% of it. Now, if you have more than one credit card, then it’s going to take the average of all of those cards. So if you have a $10,000 credit card that’s maxed out, and then one that has nothing on it, let’s say you have another $10,000 credit card that has nothing on it, your credit utilization rates actually going to be 50%. Because total, you have $20,000 worth of credit limit, and you’re using 10,000 of it. So your credit utilization rate is just basically how much you owe, versus how much you have available. And the goal is to keep it under 30%. And this total amount you owe on your debt accounts for 30% of your credit score. So the less you owe on the credit that you have, the higher your score is going to be. And why is it it’s because you appear as less of a risk.
Length of credit history
The third factor that helps determine your credit score is actually the length of your credit history. And this comes down to 15% of your credit score. This is basically just the average amount of time that you’ve had credit. So the longer your credit history, the less risky you up here. So if you have five credit cards, or if you have five debts, and the oldest debt, the oldest credit card you have you pay off and you close that card, then that old card is going to significantly impact your length of credit history because it’s now gone. That’s why whenever you close an account, maybe you pay off a car, maybe you pay off a debt or you close a credit card, it might impact your credit score, you might see it drop, because it’s impacting your length of credit history. Now, will it drop forever? No, it won’t. But it is important to take that into consideration. And just know that that’s part of how your credit score is actually calculated.
The last two factors both take up 10%. So they’re not as integral they’re not as important. The first factor is new credit. This takes up 10% of calculating your score. And that’s just how many accounts someone has that are new. So this is when you consider having credit inquiries. So how many new accounts are you opening up a hard inquiry so if anyone tells you hey, we have to do a hard inquiry or a hard credit check that is going to impact your credit score, but a soft inquiry will not impact your credit score.
Types of credit
the last factor is types of credit and that calculates 10% of your credit score. And that just goes over the different types of credit that you have. Maybe you have a car loan, a mortgage, some student loans, credit cards, there’s not much you need to worry about there.
6 Tips to Raise Your Credit Score
Now that we know what exactly goes into calculating your credit score as well as the percentage of each factor that affects your credit score, we can talk about actual tips you can implement to start raising your credit score. Specifically, we’re going to be able to determine which actions will give us the biggest bang for our buck when it comes to raising our credit score!
1. Check credit report for any errors (dispute any errors)
Tip number one is to check your credit report for any errors and dispute any errors that you see. If you haven’t pulled your credit report recently, then you’re going to want to do this as soon as possible. In fact, that’s one of the action steps that I’m giving you at the end of this episode. Your credit report will give you a history of accounts that you still have open, close and accounts that have been sent to collections. And when you’re scanning through your credit report, you need to make sure that everything listed is true. If anyone has ever opened a credit card or a loan under your name, you’ll be able to see it right there. And then you can actually dispute any charges that are not true so that your credit score isn’t affected. I personally think that this tip is one of the biggest and most important ones because it’s truly the foundation to understanding your credit score. And knowing your credit history. In fact, there was actually a time when my husband pulled his credit report. And we did see something that was incorrect on his credit report. And we didn’t know it was there, we didn’t know that this debt had gone to collections. That wasn’t even his so he ended up disputing it getting it removed. And it really did help bring up his credit score overall.
2. Get current on your bills
Tip number two is to actually get current on all of your bills. So if you’re behind on any of your bills, maybe you haven’t paid your cellphone bill in a while or your utilities bill. If you’re behind at all, I want you to make it a priority to catch up as soon as possible. Being current on all of your bills is important. And it shows Hey, I’m responsible with money, I’m going to pay my bills on time to get current on all your bills, make minimum payments on everything else, and pay off all of your overdue bills as soon as you possibly can. You can do this in a lot of different ways you can try selling things around your home to bring in extra money to help get current on some of your bills, you can try out a new side hustle, you can cut back in other areas, whatever you do find a way to get current even if it means sacrificing for a small period of time, so that you are just on track and on time with all of your bills, I promise that you won’t regret putting in a little bit of extra work to get current on all of your bills.
3. Pay your bills on time
The third tip is to pay all of your bills on time, getting current on your bills, and paying your bills on time is going to have a direct impact on that payment history portion of your credit score. So late payments and missing payments, they can cause your credit score to drop, yes, even your utilities bill, even your water bill, even your electricity bill. So to keep this from happening, make sure that you’re paying your bills on time every single month. This means that you have to stay organized, you have to know how much money you have in your account when your bills are due. And choosing systems that help you pay those bills. So for me personally, most of my bills come out on auto draft, I have them automatically drafted out of my account. The only bills that I don’t have on auto draft are the ones that don’t actually allow me to be put on auto draft, I think we have like two bills that will not let us do auto draft so we have to manually pay them. But being able to just set up all of my bills on auto draft helps me know that my bills are going to be paid on time. So once you’ve done that now now you need to make sure you have money in your account. If you’re having these bills automatically withdrawn from your checking account. You need to make sure that there’s money in there you have to have enough money to cover your electricity bill whenever it’s due. And so for me, that’s where I like to use Quicken to help me basically organize my spending, organize my expenses, organize my finances, so that I know how much money I have left after those bills come out so I can kind of pre plan for those bills, which honestly makes it so much easier for me to know that hey, my bills are gonna be paid on time and I have enough money in my checking account to cover them another option to help you pay your bills on time and I know a lot of people that do this is they owe Open up a second checking account just for their bills. So their income comes into your checking account A. And then they take the amount of money that is going to be auto drafted out of their account for all of their bills, and they transfer it to a checking account B, and they call that their bills account. And then what they do is they have everything auto drafted out of that account. And they can use any of the money left in checking account A to live off of to fill their car with gas to buy groceries to go out to eat, to do whatever else they need to do. But they’ve already designated all of the money they need for their bills, they’ve moved it over to account B, they don’t use that money for anything else. But to cover their bills. This is also a really great option. If you want to honestly just kind of build in your own little system to make sure you have enough money to cover all of your bills.
4. Stay under your credit limit
Tip number four is to stay under your credit limit, this is going to directly impact the total amount owed on your credit score. So 30% of your credit score is calculated from the total amount you owe, which is that credit utilization. So by staying under your credit limit, it’s going to signal to lenders, it’s going to signal to your credit score, hey, this person is reliable, this person has a lot of credit, they’re not using it all. So they are not a risk. I have a really good friend. And I actually write about this story in my book that I’m working on. But her husband we were we sat I sat down with her and her husband to talk about creating a debt payoff plan. And we talked about their credit cards. And he told me that he would get really excited when he would look at their credit cards. Because if they either increased their credit limit, or if they paid off part of their card and they had more money left, they had they had extra money now, he actually saw that as money that he had that he could spend. And so the way he saw it was hey, I can’t wait to max out that credit card because that’s our money. However, maxing out a credit card is not going to raise your credit score, it actually tells the lenders, this person has a lot of debt. They’re using all of their credits, so they’re probably strapped financially. So instead, stay under your credit limit, try to stay under that 30% credit utilization rate. And if you’re willing to do that, it’s going to have a really big impact on the total amount owed, which is going to increase your credit score over time.
5. Have a credit card and pay it off each month.
Tip number five is to have a credit card and pay it off in full every single month. This is a really good way to raise your credit score. And it’s exactly what my mom told me to do. So many years ago,
I got my Express credit card, I put one thing on it and I paid it off in full every single month. By doing that I was able to build credit history credit length, I was able to show that I was paying my bills on time. And I kept my credit utilization low because even though it was a $300 limit, I wasn’t maxing it out every single time I was only buying one thing. So choose a credit card, put one bill on auto draft and pay it off every single month. This is a really good way to impact your score positively. Will it take time? Yes. But is it worth it? Absolutely.
6. Pay off debt
tip number six, my favorite tip of all is to actually pay off debt. So the more you pay off debt, the higher your credit score will rise. I know that some people will say I paid off my car and my credit score went down 20 points. And sure, sometimes that happens, but paying off debt, whether you lower that credit card balance or get rid of that car loan, it’s going to lower your credit utilization rate Not to mention that paying off debt just gives you more choices. It offers you choices with your money that you might not have had before because you’re not saddled with student loan payments or credit card payments or car payments. Because you don’t have that monthly expense every single month, you have more choice with what you want to do and how you want to spend your money. When you’re debt free. Just doors open to you that you never thought were possible. You have more choices. And if that’s something that you really want to do, then go back and listen to episode number 34, which is all about how to pay off debt fast. I’m also going to link in the show notes to my debt free roadmap, which is a free roadmap that gives you the step by step path you need to take to pay off your debt with without hating your life along the way.
Now, I would love for you to walk away with some action steps that way, you know, okay, what are two things I can do now to help me raise my credit score. So here’s what I would love for you to do. First, I would love you to pull your credit report. So you can actually do that by going to annual credit report.com, where you can pull your credit report for free every single year. So pull your credit report and look at your credit score. Look through every single debt that is listed there and make sure there’s not any errors. If there are any errors, I want you to dispute them. So that’s the first thing I want you to do is I want you to actually pull your credit report, understand your credit score and look for any errors. The second thing is I want you to start implementing at least three of these tips. Maybe you say, Okay, I’m going to get current on my bills, pay my bills on time, and have a credit card and pay it off every single month, I want you to just start implementing these because honestly, these six tips aren’t just tips to help you raise your credit score, but they’re tips in general to just help you be better with your money overall.