When you’re coming out of bankruptcy or another financial crisis, your credit score might be lower than ever. That’s not a good thing. Your credit score affects your ability to get into a rental property you want, get a job, how much you pay for insurance, some utilities, and of course, determines whether you can get a credit card, car or home loan.
You need a good credit score to optimize your opportunities, financial and non-financial. Do these give things to rock your credit score and get it where it needs to be.
1 – Pay down card balances and lower utilization
A big part of your credit score is credit utilization. It makes up 30% of the calculation. Utilization can be easily calculated by adding up your total credit card debt and dividing by your total credit limits. If you owe $500 on a total of $2k in credit lines, your utilization is 25%.
That’s excessive. Ideally, a very low utilization is ideal, less than 10%. If you owe more than 30%, your credit score will drop, and trigger rejections for new credit opportunities. To lower utilziation, lower your credit card balances by spending less and chipping away at your existing balances.
2 – Pay bills on time for a positive payment history
An even more significant aspect of credit score is payment history. It represents 35% of your overall credit score. Nothing boosts your credit score more than consistent, on-time payments. If you must run late on a payment, try and avoid one that reports monthly to the credit bureaus.
Even a single missed payment can tank your score. Run past the grace period on a mortgage or auto loan payment or a credit card, and your score can plummet by up to 100 points. That’s devastating. If you do run late, pay ASAP, then call the creditor to ask them for leeway this once.
3 – Don’t close old accounts or open too many new
The average age of accounts makes up 15% of the credit score algorithm. The number is easy to crunch. Look at how long your credit accounts have been open and average that number. Count all credit items, not just credit cards. Add up the years accounts were open, then divide by the number of accounts.
If you’re considering closing an old credit card account you rarely use, or that has a high annual fee, do the math on what closing it will do to your age before you close it. Also add new accounts slowly and consider the impact on your average age before you apply for new credit.
4 – Blend of installment and revolving credit
If you have only credit cards and no other forms of credit, this aspect of your credit score suffers. The credit mix is just 10% of your score, so it’s not a crippling issue, However, if you only have one type of credit, it’s something to consider if you’re trying to boost your score and need an instant lift.
A mix of some installment loans (car loan, student loans, mortgage) and revolving credit (i.e., credit cards, store cards) is ideal, but you shouldn’t go out of your way to acquire debt simply to boost this credit score factor.
5 – Limit hard pulls
There are two type of credit inquiries – hard pulls and soft pulls. When you apply for new credit, it’s usually a hard pull where they see your credit record and the credit bureau logs the request and dings your credit slightly. A soft pull doesn’t hurt your credit.
Soft pulls can be used for pre-approvals and for existing creditors to assess you for increased credit lines, etc. To avoid excessive hard pulls, pre-screen creditors and only apply where you know you meet the criteria. Hard pulls have less effect on your score and eventually fall off the report.
A complex issue simplified
Further complicating your credit score is that these factors interplay and affect each other. If you close an old account, not only could you drop your average age, but you could increase your utilization because you have a lower overall credit line.
If you want a higher credit score but don't know how to get there, check out Credit Score Keys. We can help you rebuild your credit score after bankruptcy or another financial crisis.