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Apr 01, 2018

Avoiding a Mediocre Credit Score

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Think credit scores are complicated? You aren’t alone. The complex nature of credit scores can be discouraging and make you want to give up on improving your credit score altogether. Okay, so maybe you don’t even know your score to determine if it needs improving… don’t give up! Credit scores paint an important picture of who you are and your ability to manage money and the responsibilities that come with credit. Your score can help you save money through better loan rates, assist in qualifying for new credit, improve appeal to potential employers and landlords, and even cut expenses on your auto insurance. It’s that big of a deal.
While the calculations used to determine credit scores may be intricate, understanding how to manage it doesn’t have to be. There are some tried and true ways to build a better score and not suffer the lifetime effects of a mediocre credit score. And really – when does anything labeled as “mediocre” sound great? Let’s explore the elements of your credit score and a few tips on how to boost your number; we’ve also noted what portion of your score each area represents.
Did you know your credit score is figured from information provided by creditors about your credit repayment history to each of the three credit bureaus (Equifax, Experian, and TransUnion)? Your score can be different with each bureau if the information they have about you is different, so it’s important to review those details from each report. To do so, you can request a report from each bureau once per year from for free.
Pay your bills on time (35%). The biggest factor determining your credit score is your payment history and unfortunately being fashionably late isn’t a good thing for your credit. Set up auto-payments when possible or set up calendar reminders of when payments are due to avoid getting dinged for a late payment Generally, payments over 30 days late are those that impact your score; you may also get charged a late payment fee from your lender making late payments a bit of a double whammy. Even if you’ve missed or made late payments in the past, it’s not too late to pay outstanding balances and start making them on-time going forward. Multiple missed payments can cause a snowball effect, too, causing accounts to be moved into collections, become charged-off (the lender takes a loss on your loan and closes it entirely – who wants their car repossessed?), bankruptcies, and foreclosures which would greatly impact your score. One late payment could cost you over 100 points, but 12 or 24 consecutive on-time payments may boost your number significantly.
Monitor how you use your credit (30%). The second most important factor determining your score is how you use credit, taking into account your total debt, your debt on specific accounts, and how close you are to the loan’s original balance as well. Something you can help manage is how much of your revolving credit you’re using - revolving credit is how much you have available to use, like on a credit card, for example. The closer you get to your maximum available credit the lower your score goes, so aim to keep your balances as close to zero as possible. Utilizing less than 30% of your available revolving credit will increase your score, while carrying a balance over 50% of your limit could hurt your score. This factor does look at both individual and cumulative revolving credit, so you should be mindful of how your overall credit portfolio may look, too. A maxed-out card alongside a few others with little to no balance may be just as damaging as having the same amount spread across two cards leaving you with little available credit. 
Build a credit history (15%). When looking at credit scores, having a history is a good thing. If you’re considering removing old accounts that are paid in full or not used, know that it could negatively affect your score. Paid off debts demonstrate your ability to manage credit appropriately and reinforce the overall picture of who you are as a borrower.
What if you have old credit cards from retail stores (“Would you like to open one to save 10% on your purchase today?”) but don’t want to manage them any longer? Keeping those open, although beneficial to establishing credit history, can present opportunities for identity thieves since you don’t use or keep an eye on them. It’s a delicate dance to maintain history without compromising your ID security.
What if I don’t have any or much credit history? Should I open a few loans now to start building it? Opening new accounts in a short period of time could lower your score, actually. It shows that you may not be managing your money in the best way and looking for loans to support unhealthy spending habits. And keep in mind – each time you apply for a loan but don’t open it or are not approved, your credit is reviewed. Be thoughtful about how you apply for loans and talk to a trusted lender if you have questions or concerns about how doing so could impact your score.
Diversify your credit, but do so wisely (10%). Proving that you can manage different types of credit wisely can aid in improving your overall score. Keeping a mortgage in good standing (not behind on payments) is good, but keeping a mortgage, credit card, student loan, and auto loan in good standing is even better. While it’s usually not a good idea to open an account solely to improve this category, it’s important to know that your ability to pay all of your credit accounts on time is important.
Limit applications for new credit (10%). Ever applied for a credit card to get a free giveaway or to be entered into a drawing? While applying for a new credit card at a Twins baseball game may get you a free t-shirt or hat, it could also be hurting you score. Check your reports to see how many inquiries have been made and if they are “hard” inquiries that will affect your credit. While “soft” inquiries like car insurance reviews and taking advantage of credit card preapproval offers will show up on your report, they won’t affect your score.
Fix mistakes (even if you didn’t make them). This last area isn’t really an element of your score but it’s an incredibly important aspect to be mindful of. By pulling your credit report from you may find there are errors on your report. If so, you’re not alone - almost 25% of all reports contain an error somewhere. If you find an error, you’ll want to file a formal dispute with the specific bureau requesting that the error be fixed; this website is a great resource if you find yourself in this situation. Under the Fair Credit Reporting Act, the three credit bureaus (Equifax, Experian, and TransUnion) have 30 days to investigate and remove the error.
It’s tricky to determine exactly how many points your actions (good or bad) could impact your credit score; your score is tied to the unique information on your report. Focusing on these five categories is a proven strategy to improve your credit score. You have the tools - now go boost your number!

Updated October 2019

Contents of this blog article are intended to provide you with a general understanding of the subject matter. However, it is not intended to provide legal, accounting, or other professional advice and should not be relied on as such. Information may have changed since the publication date.

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