These days, there’s no shortage of interest in reviewing your credit report and score, and, thankfully, there’s no shortage of ways of doing so.
Your credit report determines your credit score, and your score plays a significant role in your approval odds for that dream home you found on Zillow or that credit card with travel rewards.
Most people know what their credit report and score impact, but do they know what impacts their credit report and score? There’s more to improving and maintaining a strong score than making your payments on time.
Components of Your Credit Score (Most Impactful to Least Impactful)
- Payment History – I know I just said there’s more to your score than making on-time payments, but there's nothing more important to your score than making on-time payments. A missed or late payment can stay on your credit report for up to seven years.
- Credit Utilization – This doesn’t get the attention it deserves. Say you have only one credit card, with a limit of $5,000, and you use the card to book a vacation that costs $2,500. When the card’s balance is reported to the credit bureaus that month, your report will show you’re utilizing 50% of your available credit. Ideally, you should utilize 30% or less of your available credit if you want to help your score. You can do this by, of course, making fewer purchases using credit and annually requesting credit increases from your lender. Understand doing the latter requires greater self-discipline though.
- Length of Credit History – Like many things, this comes with age. The older your oldest open account, the more positive the effect this component has on your score. This means you shouldn’t close accounts unless you need to close them. Ask your lender if your account will automatically be closed after a period of inactivity, which can and does happen sometimes. If it will, utilize that form of credit at least once every six months.
- Mix of Credit Types – In addition to one or more credit cards, or revolving credit, it’s good to have installment credit, or credit with a fixed number of payments like a mortgage or auto loan.
- Recent Inquiries – There are soft inquiries and hard inquiries. A soft inquiry, like checking your credit score using Credit Karma, doesn’t affect your score. A hard inquiry, which occurs when you apply for a loan or new line of credit, will lower your score by several points. The good news is this is only temporary. A hard inquiry no longer appears on your credit report two years after it’s been made.
Accessing and Learning More About Your Credit Information
Passed in 1970, the Fair Credit Reporting Act allows you to request a free copy of your credit report from each national credit bureau every twelve months. The three major credit bureaus, those your lender will likely use when reviewing your application for credit, are Equifax, Experian, and TransUnion.
If your bank hasn’t already offered you the capability to check your credit score for free using a service like CreditWise, there are a number of other services you can use, including Credit Karma and NerdWallet. (Equifax, Experian, and TransUnion allow you to do this, too, but it often comes as part of a paid package.) In addition to letting you check your credit score, many of these services summarize your credit report and alert you if they notice changes to it. If you notice something you believe is incorrect, contact the credit bureau reporting it in writing.
If your credit score isn’t where you want it to be, your financial life isn’t doomed. The easiest way to improve your score is by making payments on time, utilizing as little of your available credit as possible, and avoiding applying for too much credit in too short of a span of time.
Something that will doom your financial life is living beyond your means. Debt, a tool, can quickly become a burden. The way you use your credit is just as important as your credit report and score.
What Is a Credit Score? What Are Credit Score Ranges? from NerdWallet
What Is a Good Credit Score? from NerdWallet
What Factors Affect Your Credit Score? from NerdWallet
Disputing Credit Report Errors: A How-to Guide from Credit Karma