Are your credit scores stuck, even though you do most of the obvious things right? You pay your bills on time (payment history accounts for 35% of your scores), you don’t often open new accounts (inquiries make up 10% of your scores) and you’re not recovering from a bankruptcy or default. Yet you still struggle to get your credit scores into prime range.
“There is no magic bullet for credit scores. You’ll have to shoot twice,” said Rod Griffin, director of Public Education at Experian. “First, pay on time, every single time. The second bullet is utilization.”
Your credit utilization, and taking steps to lower it, could be the key to better credit scores. (If you’re curious about how you’re doing, you can view two of your credit scores, updated every 14 days, for free on Credit.com.)
What Is Credit Utilization?
Utilization is the amount of debt you have in relation to your total credit limit. So, for example, if you have one credit card with a $1,000 limit and your balance is $500, your utilization is 50%. Credit experts recommend keeping your credit utilization at 30%, ideally 10%, of your total credit limit. (More on that later.)
In most cases, only revolving debts — not debts paid in installments, like mortgages and auto loans — contribute to your utilization ratio. (Find out more about revolving debt here.)
The reason revolving debt counts against your score is that can indicate risk. The credit industry tends to assume consumers who use a higher percentage of their open credit are more likely to fall behind financially.
“A higher utilization rate means a higher risk, which has a greater impact on your credit scores,” Griffin said.
Why Does Credit Utilization Matter?
Credit utilization is a critical element of credit scores, and credit scores lead directly to credit opportunities. Consumers with lower scores won’t qualify for the best credit products available. The credit products that are available to people with lower scores generally have higher interest rates, lower limits and fewer benefits.
“Credit scoring doesn’t look at money. Income and assets, odd as it sounds, have no bearing on whether or not you’ll pay your bills on time. Credit scoring shows the likelihood that the person will pay the debt back as agreed,” Griffin said.
Because of this, it can be very tough to achieve a top credit score if your utilization is very high, even if your debt is low.
How to Lower Utilization & Still Use Your Credit Cards
If you use credit cards, find out when your issuer reports your utilization ration and make sure you pay your balance off beforehand. It can sometimes be before your payment is due each month.
“If you don’t pay before the date the bank reports the information to the credit bureaus, you’ll show a balance,” Griffin said.
When you apply for a credit card, a couple of things will happen. First, the issuer is going to pull your credit so it can get an idea of whether you’ll be a good borrower. If it decides to issue you a credit card, you’ll be assigned a credit limit.
What’s a Credit Limit?
It’s the amount of money a credit card company will allow you to borrow at any one time. There are several different factors that are considered when assigning a credit limit, but a big one is your credit score. (The other big one is income.) Someone with excellent credit has proven they can borrow money and pay it back on time. This person is likely to receive one of the higher credit limits allowed. However, if you have bad credit or not much credit at all, you might not be quite so lucky. You might even be limited to applying for a secured credit card, which requires you to put down a cash deposit that serves as your credit line.
Time for an Upgrade?
Let’s assume you’re an average borrower, and your credit card has an credit limit of $3,500. You find out that your house needs a new roof and it’s going to cost $7,000 to replace. While you have a $5,000 emergency fund, you don’t want to use the entire amount. Unfortunately, because of the credit limit on your card, you’re not going to have much choice unless you ask your credit card company to increase your credit card limit.
But is it a good idea to ask for one? Let’s go over the pros and the cons.
What Are the Benefits of a Credit Limit Increase?
It should lower your credit utilization ratio. Your credit utilization ratio, or the amount owed compared to your credit limit(s), is the second most important factor among credit scores. If you were to max out your card, your credit utilization ratio would be 100%. — and very, very bad for your credit score. It’s generally recommended you keep your balances below at least 30% and ideally 10% of your total credit limit, so asking for a credit limit increase could put you closer to those thresholds, which should help your credit score. (You can find 10 more tips for improving your credit here.)
It can be your rainy day fund. Not everyone has an emergency fund set up when an unexpected expense pops up. (In fact, most Americans do not.) When this happens, it’s nice to have a credit card with a higher credit limit. You can use your card to cover the expense, but will hopefully still be able to keep some breathing room between the balance and your credit limit.
You’ll receive added benefits on large purchases. Are you planning to purchase a big-ticket item in the near future? How about a new refrigerator or washer and dryer? If so, there are perks to having a higher limit. It’ll allow you to put these expenses on your credit card, either because you’ll have the extra credit or you’ll have a bigger buffer when it comes to your credit utilization. As such, you’ll not only earn rewards, but also receive several consumer protection perks. Many different credit cards come with purchase protection, price protection, and an extended warranty. Note: The rewards strategy is best employed when you can pay your balance off in full by the end of the month; otherwise, you’ll lose those points, miles or cash back to interest.
What Are the Drawbacks of a Credit Limit Increase?
You might not want the hard inquiry. Each time you request a credit limit increase, your card issuer will most likely pull your credit report. The purpose of this is to make sure you do not have other large, outstanding loans that will make it difficult to pay your bills on time. The credit pull will result in a hard inquiry, which will affect your credit score by a few points. However, the effects shouldn’t last long — hard inquiries stay on your credit for two years but only affect your scores for 12 months. If you already have less than ideal credit and are concerned about reducing your score any more, requesting a credit limit increase might not be the best move. (Not sure you can take a hit? You can view two of your credit scores, updated every 14 days, on Credit.com.)
You can’t be trusted. There are certain people that just can’t trust themselves with additional money. If they have access to a higher credit limit, they see it as a reason to spend more. If this is your reasoning for getting a credit limit increase, it’s probably a good idea to put off the request.
Q: Got a letter that one of my credit cards will be closed due to inactivity. I shouldn’t let that happen, right?
A: There are a lot of reasons you may not want to close a credit card, even if you’re not using it very often. But before we get into that, let’s talk about if and how you can stop a credit card company from closing your account.
What You Can Do If Your Bank Wants to Close Your Card
There are several reasons a creditor may want to close your card account — inactivity, fraud and default, to name a few — and every financial institution will have its own policies for handling those situations. If your bank sent you a notice about the account closure, check it for information on how to stop it. For example, it may say that using the card before a certain date will prevent it from being closed due to inactivity. Beyond that, call your bank for answers.
“Certainly people should contact the card issuer if they object to the account being closed,” said Nessa Feddis, senior vice president & deputy chief counsel for the American Bankers Association. “The bank may keep it open if it is appropriate.”
In the end, it’s up to the bank, and keeping your account active and in good standing can help you avoid an unwanted closure.
“There is no requirement to provide advance notice,” Feddis said. “Otherwise, for example, someone who no longer has the ability to repay would be tempted to use the entire line before the account was closed and then be unable to repay.”
Here’s an example of how it could affect your credit utilization: Say you have two credit cards, each with a $1,000 limit (meaning your overall available credit is $2,000). You only spend about $500 on one of the cards and pay off the balance each month, but you never use the other one. You want to use as little of your available credit as possible, both on individual cards and as a whole, but your overall credit utilization is most important for your credit score.
With both cards open and that $500 balance, you have a credit utilization rate of 25%. That’s pretty good — credit scoring companies recommend you keep your overall credit utilization rate below 30% or, ideally, below 10%. But because you’re not using that other card, the issuer decides to close it. You’re still using about $500 of that other credit limit every month, but now your overall available credit is only $1,000. That turns out to be a 50% credit utilization rate, and the increase from a 25% utilization rate to a 50% utilization rate can hurt your credit score.
The other thing to think about is your credit age: It’s calculated by averaging the age of your open accounts. The older your average credit age is, the better it is for your credit score. So if your credit card is on the older side of your credit history, it’s helping keep your average credit age up (because it can go down every time you open a new account). Take that old credit card out of the equation, and you may see your credit card suffer until enough time has passed for your active accounts to bring up the average age of your credit accounts.
Of course, there are good reasons for closing a credit card. Perhaps you really dislike working with the issuer, you’ve run into too much trouble with credit card spending or the card carries an annual fee that’s not worth it (if so, see if you can get it waived). Whatever you decide, it’s important to know how it will affect you. You can see how your credit cards and other accounts factor into your credit scores by getting your free credit report summary, updated every 14 days, on Credit.com.
We all know that your credit score is really important, so it’s no surprise that you’d want to increase your credit score whenever possible.
First, it’s important to know what your credit score says about you. It’s a measure of your creditworthiness. It’s not a measure of your wealth. It’s not a measure of how much you make. It’s simply a measure of how risky a borrower you are. Risky borrowers are ones that miss payments or default. Safe borrowers pay on time and have a long history of doing so. (You can see how your financial habits are affecting your credit by viewing two of your free scores on Credit.com.)
To help you better understand credit scoring, here are four myths around scores that are totally wrong.
1. Carrying a Balance Helps Your Score
Carrying a balance on a credit card means you don’t pay it off in full each month. As a result, you pay interest on the credit card debt, often in the double digits. Carrying a balance is not necessary for improving your credit at all.
Your credit card issuer generally reports your balance when the statement period ends. It doesn’t break it out into the balance you carry and the balance you accrued that statement period. If you spend $1,000, pay it off entirely, and then charge another $1,000 – your credit card company will tell the credit bureaus that you had two months with a balance of $1,000 and on-time payments.
If you spend $1,000, pay off $500, charge another $500 – your credit card company will tell the credit bureaus that you had two months with a balance of $1,000 and on-time payments. By carrying a balance of $500, you’re paying more in interest but with no real benefit to your credit score.
Carrying a balance will not increase your score, so pay off your statement each month if you can.
2. Your Credit Utilization Doesn’t Matter
If you’re close to maxing out on your credit cards, that’s a bad thing. Utilization is a measure of how much you’re using your available credit. Use too much, and you’re seen as a risk. Use too little, and you’re seen as safer.
You may note that utilization, which plays a role in 30% of your FICO score, has nothing to do with your income. Making extra money can impact your total credit limit, so use it to your advantage if you can get an increase on your credit limits, but the income itself doesn’t help utilization.
You could be making millions of dollars a year but your score could be lowered because you’ve utilized too much of your available credit.
3. You Only Need a Credit Card
Getting a credit card is a good start to building a strong credit score, but it’s not enough. You really want to have a mix of accounts, like a student loan or a mortgage, to show you can handle different types of debt. This mix makes up 10% of your FICO score.
You shouldn’t take on unnecessary debt with the sole purpose of building credit, but it’s important to note it’s hard to get a high credit score without it. An unsecured line of credit, like a credit card, is just a strong first step.
4. Paying Off Old Delinquent Debts Will Instantly Fix Your Score
We all make mistakes and perhaps one of yours is now a delinquent loan or a charged off credit card account. If you have the funds, it may be tempting to pay them off. And, in fact, it might be the best course of action, since unpaid debts can lead to a collections account, judgment or wage garnishment — and the first two of those three adverse actions can directly lower your credit score, while the last one can really hamper your finances in general.
Still, it’s important to understand that paying these old debts won’t automatically fix all your credit score problems. Most negative information remains on credit reports for seven years (some bankruptcies can stay on for ten) — and that includes delinquent accounts that have been brought back into good-standing. (You can go here to learn more about how long things stay on your credit report.)
And, if you pay off an old debt, it may restart the 7-year clock. So, yes, past mistakes can affect your scores for quite some time. The good news is, the effects they have on your credit will lessen over time. And there are things you may able to do in the interim — like paying down high credit card balances or disputing errors on your credit reports — that can raise your scores.
Plenty of parents make their kids authorized users on their credit cards, and for good reason. Credit cards provide a way to build credit, giving teenagers an early financial leg up (provided the card is managed responsibly) by establishing a credit history before they’re old enough to get a credit card on their own.
It can also be a great chance for parents to supervise how their children are spending and help them learn financial lessons, like making payments on time or reading a credit card statement. Even checking credit scores and reports through free credit score tools (such as those on Credit.com) and free annual credit reports at AnnualCreditReport.com can help them reach their financial goals.
But at some point, there comes a time when all parents cut the cord (and the card), kids must make it on their own in the world of credit. What now?
If that recently happened to you, there are two starting points where you’ll likely find yourself: having a good credit score or having a not-so-good credit score.
Remember, if you’re under 21, you’ll need to demonstrate an ability to repay or have a willing co-signer to qualify — federal law prohibits issuers from extending credit cards to you otherwise. You should also check your credit before applying so you know where your score stands, because the inquiry will temporarily ding it.
Better yet, you can ask your parents to take your card but keep you as an authorized user on their account. As long as they are making payments on time and not carrying high balances, this will help you even further in establishing a good credit history. That’s becauseroughly 15% of major credit scores is based upon the length of your credit history. So the longer you’ve had credit, the more points you’ll earn toward your total credit score.
The good news is, you have options, and getting disconnected from your parents’ credit could be a very good thing for your scores. Authorized users are not considered responsible for making payments, so if negative information is appearing on your credit reports because of the account, you can contact your lender and asked to be removed from it. After that, the account should stop appearing on your credit reports. If it doesn’t, you can file a dispute with the credit bureaus.
Next, you can start on your own financial road by first checking your credit scores to see exactly where you stand. You might also want to check your credit reports to make sure everything on them is accurate (see the free credit scores and reports links in the second paragraph). If afterward you’re certain you have “thin” or “bad” credit, there are some credit cards — both secured and unsecured — that you can consider applying for to help you establish or rebuild credit.
If you find out through checking your credit scores that the situation is actually not all that bad, you can try applying for a credit card for fair credit.
Credit cards can be a simple way to establish and build credit, but they’re not your only option. You can also consider credit-builder loans to get you started.
Whatever your decision, remember that your credit is an important for everything, from getting a car loan to renting an apartment, opening utilities and sometimes even landing a job. So taking care of it should be a top priority. You can build good credit in the long-term by making all loan payments on time, keeping debt levels low, limiting new credit inquiries and only adding a mix of credit accounts as your wallet and score can afford them.
We hear it from readers constantly: I’m paying all my bills on time, so why isn’t my credit score going up?
This feeling that you’re doing everything right and not getting rewarded for it is one of the most frustrating things about credit scores. And the simplest answer to that question is almost as frustrating: It depends.
First of all, credit scores are the result of complicated formulas, so that makes it difficult for the average person (even personal finance writers) to pinpoint exactly why your score is the way it is. On top of that, there are dozens of credit scoring formulas, and you can’t keep track of all of them. Finally, and here’s the really important part, everyone’s credit history is unique. Without looking at your credit report, a credit expert can’t say exactly why your score isn’t changing.
In general terms, there are a few things that could be causing your credit score to stagnate. Here are four of them.
1. Your Credit Card Balances Are Too High
Payment history has the greatest impact on your credit scores, but making on-time payments alone won’t give you a good credit score. It’s certainly important, given how much a late payment can hurt your credit score (it can knock about 100 points off your score, depending on what else is in your credit history), but there are four other major factors that affect your score. The next-most important (after payment history) is your amount of debt.
The key is to keep your revolving credit balances (like credit card balances) as low as possible. This relates to credit utilization: Your revolving credit accounts generally have limits, and the closer your credit balances are to those limits, the higher your utilization. High utilization, in which your debt is more than 30% of your available credit limit, will keep your credit scores down.
“I think it’s common for a high credit card balance to keep scores [stagnant and low],” Jeff Richardson, a spokesman for VantageScore Solutions, said in an email. “Consumers will and should expect their scores to increase as a delinquency gets older and older, but if they still have a high utilization, it’s certainly possible that the score can only rise so much until they pay down the balances on their card(s).”
2. Something Seriously Negative in Your Past Is Dragging You Down
Perhaps you’re paying debts on time and keeping your credit utilization low. In that case, you may want to look at other aspects of your credit history. If there’s something exceptionally negative in your credit history, like a bankruptcy or foreclosure, it can take many years for your score to recover. Most negative information can remain on your credit reports for up to 7 years, so while you wait for the effect to lessen over time, it can help to focus on what you can control: making payments on time and keeping your credit utilization low.
3. You’re Missing Something Important
Though they are the most influential factors in your credit score, on-time payments and credit utilization are not the only things that determine it. How often you apply for new credit, the length of your credit history and the mix of accounts in your file also play an important role in credit scoring.
There’s not much you can do about your length of credit history other than exercising a lot of patience. The longer you’ve been an active credit user, the better your score will theoretically be, but there’s nothing you can do to speed up time. One of the best tips on this topic is to keep your oldest credit account open, because your credit age is an average of your accounts’ ages. You may have a good reason for closing an old account, but it’s a decision you shouldn’t make lightly.
As far as mix of accounts goes, you would ideally have active installment and revolving accounts to show that you’re capable of responsibly managing different kinds of credit. Sure, you may be doing a fantastic job paying your credit cards on time and keeping their balances low, but without any active installment loans, that’s only going to do so much for your credit.
Staying on top of just one credit account can be challenging, although doing that well can give you a great score. Mix of accounts is a small part of what determines your credit scores, so opening up a new credit account solely for the sake of your credit score doesn’t usually make much sense, especially if you can’t manage it and wind up in debt.
4. There Are Errors on Your Credit Report
When’s the last time you checked your free annual credit reports? It’s a smart thing to do regularly, as you can spot errors that could be keeping your credit score lower than it should be. If you find an error on your credit report — that can be anything as little as a misspelled name or as problematic as a wrongful late-payment notation — you can dispute it with each of the credit bureaus reporting the wrong information.
If you find several problems or are overwhelmed by the task of trying to fix your credit, you can hire professionals to help out. Keep in mind, anything a credit repair company does, you can do yourself for free. Also, make sure to research any companies you’re considering. A legitimate credit repair company will not promise a specific jump in your credit score, which is illegal. (You can learn more about how credit repair works here.)
It’s also a good idea to check your credit scores regularly. You can see two for free, updated each month, on Credit.com. Viewing these can help you track changes in your credit scores and let you know if and how you should adjust your behaviors to build good credit.
[Offer: If you need help fixing errors on your credit report, Lexington Law could help you meet your goals. Learn more about them here or call them at (844) 346-3296 for a free consultation.]
Trying to find a quick fix for bad credit isn’t easy, because for the most part, the things that go into a good credit score take a while to develop. In the most common credit scoring models, payment history has the most impact on your score, and that takes at least six months to establish. Recovering from a late payment requires even more patience. Once there’s a late payment in your credit report, all you can really do is give it time to reduce its weight on your credit score — there’s nothing you can do going forward that will make it “go away.”
But the next most important aspect of credit scoring works a bit differently. It’s called credit utilization, and that’s a measurement of your credit card balances relative to your overall credit limit. Using less than 30% of your available credit can help your credit score, and the lower your utilization rate, the higher your score will likely be. Perhaps one of the most important things to know about credit utilization is how quickly you can change it, consequently changing your credit score.
That can be a bad thing, because running up big credit card balance can quickly tank your score. At the same time, if you can quickly pay down high credit card balances, you could see serious score improvement in a short period of time.
Keep in mind you probably won’t know exactly when your credit card issuers will report your balances to the three major credit reporting agencies, so you may not see the credit scoring effect of paying off high balances right away. Issuers tend to report account activity on a monthly basis, so you’d likely see a change within a month of reducing your credit utilization.
You may want to quickly improve your credit scores for many reasons, like wanting to buy a car, take out a home loan or any number of life situations in which credit scores are a factor. If you don’t have the means to significantly reduce your credit card debt, you could consider consolidating it with a personal loan (though you’d have to weigh that against the potential negative consequences of taking out a new loan). However you want to approach improving your score, you’ll need to see how your plan is working. You can keep tabs on that by getting two free credit scores every 30 days on Credit.com.
I’ve planned four bachelorette parties in the past five years (and attended five, including my own). I have the planning part down to a science. But this time around I had a little surprise — my credit score dropped 24 points when I checked it on my way home Sunday night.
Now, I should preface this with saying that the damage is temporary. It’s not fair to say the bachelorette party “wrecked my credit” since I’ve already remedied the cause of the credit score drop — my high credit utilization this month (more on how I fixed my credit later).
In my experience, planning bachelorette parties takes a lot of coordination, a lot of ridiculous party store supplies and a lot of PayPal/Venmo/Chase QuickPay account transfers. Most of the parties have been short weekend trips for groups ranging from six to 11 people, so it boils down to a few major expenses: house rental, transportation, an activity and a dinner out. The other things you end up buying— wine tastings, drinks at bars, lunches and breakfasts — tend to get paid for individually, without a joint tab.
The major expenses often require a point person, though — one credit card to rule them all. Even when you find a great house that can accommodate everyone at a very reasonable price, someone has to pull the trigger and put it on their credit card to reserve the space and, when you’re the one (or two) planning the trip, it tends to be you. Then, you collect the money from the other attendees and pay off your credit card immediately.
I’ve never minded doing this. After all, I write for a credit website, I’m very mindful of my credit, monitor my accounts daily, check my credit scores every month, and am constantly thinking about managing my money. For some people, this would be an understandable burden. After all, a house that can accommodate 11 women for a weekend isn’t cheap. If you’re already struggling to pay your balance in full every month with just your normal spending, it may not be the best move. After all, you could be short and then face interest charges.
The Hidden Benefit of Bachelorette Party Planning
There is a notable upside to putting all that spending on your credit cards and then immediately paying them off, though— the rewards. I made $500 off my credit cards last year and paid no interest charges or annual fees. This year, I’ve already made roughly $150, so I’m on pace to beat last year’s total. If you’re using the right credit card, you can really rake in the rewards on the group expenses of a bachelorette party. For example, I used my Chase Sapphire card (read a full review here) and got double points on our group’s lunch bill this weekend.
At the end of the weekend, I simply tallied up all the group expenses and gave everyone a per-person total they owed me. Everyone transferred me the money that day, easy breezy.
Why My Score Dropped 24 Points
So why did my credit score drop so much, exactly?
I had charged enough on my credit cards that I had a 20% credit utilization this month. That means I had enough charges on my credit cards that I had spent 20% of my combined credit card limits. One thing you should know about my spending habits is that I charge nearly everything to my credit cards and then pay them off in full every month— it’s how I make so much money from my credit card rewards. So the bachelorette expenses aren’t that whole 20%. But I normally spend around 10% of my limits, sometimes 12%, and this month the extra charges bumped me up to 20% for the first time in a very long time.
How I Fixed It
This is the easy part. I used the money the bachelorette party attendees paid me and immediately paid off two of my credit cards in full. That’s brought my total utilization down to about 7% right now. (You can see how your utilization is impacting your credit scores for free every month on Credit.com.) I don’t plan to apply for any new credit this month, so a temporary credit score drop is something I can weather without issue. A healthy utilization rate is under 30%, but as you can see from my story, it’s even better to keep it under 10%. I have a good credit score, and still do after the slight ding, and I want to keep it that way.
At publishing time, the Chase Sapphire Preferred Card is offered through Credit.com product pages, and Credit.com is compensated if our users apply for and ultimately sign up for this card. However, this relationship does not result in any preferential editorial treatment.
Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.
Americans don’t waste any time picking up a credit card habit.
Between the ages of 20 and 30, young Americans typically see their credit card limits skyrocket 450% while their debt rises an alarming 300%, according to a recent report from the Federal Reserve Bank of Boston.
Young adults tend to use their credit cards as a substitute for savings by getting higher credit limits that can help them out in emergencies, says Bloomberg in a story on the Fed report. And once they’ve dipped their toes in, Americans continue to count on their credit cards: 50-year-olds use nearly 40% of their available credit compared with the 50% used by 20-year-olds.
The Fed data shows that debt rises rapidly for Americans in their 20s, before they learn how to pay off credit card debt, and it continues to increase into their 30s. It’s only when American consumers reach middle age that their credit card use levels off. When consumers reach the age of 50, their card use declines and drops to around 20% by the time they hit their 70s.
“Credit and debt show extreme life-cycle variation, much larger than the changes in income or consumption,” Boston Fed authors Scott L. Fulford and Scott Schuh conclude.
Strikingly, Americans who use their credit cards the most are more likely to keep on piling up the debt if they receive a credit limit increase. “Revolver” card users – meaning those who carry a balance from month to month as opposed to “convenience” users who pay off their balance every month – will increase their debt by 1.3% in just three months if they receive a 10% credit limit increase. As a result, the Fed finds, their debt will rise nearly 10% over time.
Only about 35% of American card users between the ages of 25 and 50 are convenience users, while the rest of credit consumers revolve their debt from month to month despite high interest charges.
Getting out of debt is the best way for 20-somethings to begin saving earlier in life, the Fed authors suggest. They note that consumers who opt to revolve debt may be using their credit availability in the mistaken belief that it is a form of wealth.
“Paying off credit card debt has a riskless return that averages around 14%, which no other asset class can match,” Fulford and Schuh write.
A perfect credit score isn’t the most practical goal: There are hundreds of scoring models, and even the same score can vary significantly month to month, because your credit history is constantly being updated.
Credit utilization — i.e, how high your credit card balances are compared to your credit limits — is one of the easiest adjustments you can make to your credit score. Even if you use very little available credit, say, less than 10%, you can still see improvements in your credit scores by using even less. You could see your score fluctuate if you go from using 3% of your available credit to 2%. Either you need to have high credit limits, spend little on your credit cards, pay off your credit cards more often than necessary or a combination of the above to keep your credit utilization as low as possible.
2. Your Credit History Is Short
The only thing that can give you a long credit history is time. Even if you’re doing everything right — making payments on time, keeping credit card balances low, rarely applying for credit and maintaining a mix of accounts — there’s nothing you can do but wait for your oldest accounts to age. Generally, if the average age of your credit accounts is younger than seven years, your credit history is considered short. Have patience and keep old accounts open, unless you have a really good reason to close them.
3. You Don’t Have a Mortgage
Account mix — or having a variety of installment loans and revolving credit accounts on your credit history — makes up about 10% of your credit score. If you have a lot of credit cards but no auto, home, personal or student loans, your score could benefit from adding one of them. Conversely, if you only have student loans, adding a credit card to the mix could also help. Account mix isn’t nearly as important as making loan payments on time or keeping debt levels low, but it could be responsible for those few points that sit between you and credit score perfection.
4. There’s an Error on Your Credit Report
Review credit reports carefully, especially if you feel like your credit scores are lower than they should be. Credit reporting errors are common, and to get them off your report you need to dispute the incorrect information with the major credit reporting agencies. Inaccurate, negative information can seriously tank your scores, and the longer it goes unresolved, the more likely you’ll see effects in other areas of your finances, such as higher interest rates for credit products.
5. You Made a Mistake Years Ago
The last seven years in the U.S. economy were tumultuous, and your credit score might still reflect that. Most negative information, like late payments and debt collection accounts, can remain on your credit reports for seven years. The older the information, the less impact it has on your credit scores, but until they age, you’ll have to deal with slightly lower scores. No matter how recent a negative trade line on your credit report is, the best thing you can do is move forward. Focus on making smart credit moves to offset any mistakes from the past.
Obtaining a perfect credit score isn’t easy. Credit scoring algorithms are complicated, and even if you do attain the highest score, you likely won’t keep it forever. Once you’ve crossed that “excellent credit” threshold of about 750 (on a 300 to 850 scale), you’ll qualify for the best interest rates and credit products. Whether you have a 799 score or an 850 won’t matter to anyone but you.