I've come across a lot of confusing and misleading information about credit scores, and it's wild that this isn't something they teach in schools! Here's a breakdown of how credit scores work based on my experience as an underwriter for over ten years.
Credit scores are influenced by three major agencies: Equifax, Experian, and TransUnion. Banks usually check just one of these, and while scores might differ a bit, they're generally similar. Here's the lowdown on how to improve your score:
1. **Capacity (35%)**: This is about how much of your available credit you're using. Aim to keep at least 80% of your credit limits available. A maxed-out $1,000 card is just as detrimental as a maxed $10,000 card!
2. **Delinquency (30%)**: Paying on time is crucial! Being late even once can drop your score significantly. Multiple late payments can be damaging.
3. **Inquiries (15%)**: If you're shopping for loans, don't worry too much. Multiple inquiries in a short time for one type of loan are generally treated as one. But frequent new credit card applications can hurt your score.
4. **Account Age (10%)**: Older accounts are better for your score! Closing old credit cards is a no-go.
5. **Variety of Loans (10%)**: Having different types of credit, like a mix of credit cards and installment loans, can help.
Also, keep in mind that things like utility bills or phone plans typically don't build your credit unless unpaid. And avoid payday loans at all costs; they can create more financial trouble.
5 Answers
My folks always told me just to pay bills on time to improve my credit score. I later learned you also need to have what they call "good debt". I guess it’s about being consistently in debt and repaying it? Was it different back then?
Right, you actually benefit more when you have higher limits with low utilization. Keep your payments regular!
What’s the best way for a young adult to start building credit? Would being added to my parents' credit account help?
Being an authorized user on your parents' card can help, but it ties your score to theirs. A better way might be to get a secured credit card with a deposit to start building your own credit.
Quick question—should I keep my credit card balance under 30% by the due date or the statement date? Can I max it out, pay before the due date, and still be in the clear?
Good question! It's all about when the balance is reported. Aim to keep it low by the end of the month because that's when they report your balance.
If you find a negative item on your credit report, you can challenge it with the agencies! The debt holder must prove it's legit, which they might not always be able to do. Dispute it, and it might come off completely. Also, it’s frustrating how much our scores can swing for seemingly no reason! It’s a flawed system.
How do you challenge it? What steps should I take?
Be careful! Disputing can mark the accounts as in dispute on your report. It doesn't hurt your score, but it can complicate closing on a mortgage. I had to deal with that and it was a headache.
I’ve been battling a negative mark on my student loan payments, but the provider’s site was down for a while. They deny my disputes every time! Any advice?
Have you considered contacting a credit counseling service? They might help you navigate disputes more effectively.
Yeah, credit scores only started becoming a thing in 1989, so it was definitely different for earlier generations.