Get A Handle On Bill Payments
More than 90% of top lenders use FICO credit scores, and theyre determined by five distinct factors:
- Payment history
- Age of credit accounts
- New credit inquiries
As you can see, payment history has the biggest impact on your credit score. That is why, for example, its better to have paid-off debts remain on your record. If you paid your debts responsibly and on time, it works in your favor.
So, a simple way to improve your credit score is to avoid late payments at all costs. Some tips for doing that include:
- Creating a filing system, either paper or digital, for keeping track of monthly bills
- Setting due-date alerts, so you know when a bill is coming up
- Automating bill payments from your bank account
Another option is charging all of your monthly bill payments to a credit card. This strategy assumes that youll pay the balance in full each month to avoid interest charges. Going this route could simplify bill payments and improve your credit score if it results in a history of on-time payments.
Use Your Credit Card to Improve Your Credit Score
Reasons Why Credit Scores Drop
Credit scores are calculated using lots of information from your credit report about your finances. This includes factors like your payment history, the amount you currently owe, your and how many accounts you have open. So when thereâs a drop in your score, itâs likely that thereâs been a change in one of these or one of the many other factors that go into credit scores.
Read on for some reasons your credit score might drop and what you can do about them.
1. New Credit Applications
A new credit application could have an impact on your credit score. Thatâs because a new credit application creates a âhard inquiry,â which can stay on your credit report for up to two years. And multiple credit applications in a short period of time may raise a red flag to lenders. Those applications could be seen as a sign your financial situation has changed, and it could put a dent in your score.
What you can do: Try to keep new credit applications to a minimum by only applying for the credit you need. And when you do apply for a new credit card, you could first check with the lender to see if they can tell you whether you may be pre-qualified or pre-approved for one of their cards. Pre-qualification and pre-approval use whatâs known as a âsoft inquiryâ to check your credit, which wonât hurt your score.
2. High Credit Utilization
3. Payment History
4. Derogatory Remarks on Your Credit Report
A Spike In How Much Credit You Use
Your total available credit limit is the amount youâre able to borrow across your credit accounts. .
With your credit limit, itâs all about balance. Using too little credit could harm your score, as youâre not able to prove to lenders how you manage credit. However, using too much of your credit limit could suggest to lenders that you’d struggle to repay any new debt. This can cause your credit score to drop.
Itâs recommended that you try to keep your below 30% of your total credit limit.
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You Closed A Credit Card Account
It may seem intuitive to close an old credit card account you dont use much, but this can actually cause your credit score to drop. Why? Because maintaining old accounts shows lenders not only how long youve been using credit, but how long youve been using it responsibly. In addition, closing an old account lowers your total amount of credit, thereby raising your credit utilization.
Why Did My Credit Score Go Down When Nothing Changed
Sometimes your score does change based on factors outside of your control, but most times your behavior influences your score in ways that may not be obvious.
Lets take a look at the factors that influence your score and a few reasons as to why it might change even when you dont think youve changed your behavior.
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Why Hasn’t My Score Changed After Paying Off Credit Cards
Your score won’t get an immediate update once you pay off credit cards. That can be a disappointment when you’ve put a lot of effort into cutting down your balance. But all other things being equal, you will likely see an improvement in a relatively short period of time.
The credit scoring models may not update your credit score immediately so that they can also take note of whether you’ve simultaneously taken on more debt, which would also be reflected in your credit score. All in all, allow for at least one to two months after paying off a balance for your credit score to be recalculated.
Your Credit Utilization May Have Increased
An additional factor that affects your credit score is utilization, which is simply the amount of credit available to you that youre actually using. For example, if your only account is a credit card with a $1,000 limit and you have a balance of $200, youre using 20 percent of your available credit.
In general, lenders want to see that youre using 30 percent or less of your available credit, as this signals that youre able to manage your finances without leaning too heavily on credit.
If you pay off a credit card debt and close the account, the total amount of credit available to you decreases. As a result, your overall utilization may go up, leading to a drop in your credit score.
As a rule of thumb, its often helpful to keep older accounts open even if you dont use them often, unless they involve an annual fee or theres another good reason to close them.
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Hard Inquires: Mortgage Applications Auto Loans Credit Approvals Etc
Hard inquiries generated by lenders and credit issuers can remain on your credit report for a year or longer. If you have a lot of these entries, it could appear as if financial trouble is requiring you to apply for more credit even if thats not the case. And it can be a big red flag for lenders and may even lower your overall credit score. Most score models, including FICO, make allowances for rate shopping by ignoring related inquiries made within a 30-day period.
You Closed A Credit Card Or One Was Cancelled
Closing a credit card can hurt your credit score, especially if the card has a balance or more available credit than your other credit cards. Credit card issuers can also cancel your credit card, which will impact your creditnot necessarily because it was the creditor who closed the account, but because the account was closed at all.
Closing your only credit card or your oldest credit card can also impact your credit score.
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Where Does My Credit Score Come From
When it comes to credit scores, we are taught one fundamental lesson: A good credit score is good, and a bad credit score is bad. And for most of us, thats where our understanding ends. Many people dont know where their credit score comes from or even what it means.
Your credit score is a rating that shows the level of the financial risk involved with loaning you money. This score not only affects loans but also lines of creditlike the kind you would get with a credit card. Your credit score tells potential lenders and creditors how likely you are to pay back the money you borrow from them.
Your credit score is determined by five major factors, listed below with the percentage of their impact on your rating:
Why Does Your Credit Score Go Down When Checked
People often wonder why their credit score goes down after they or a lender checks the information on their report.
The equations that output these scores work like black boxes, and the rules and consequences around hard versus soft inquiries are complex. Therefore, it is easy to be confused.
Be clear on one key point. Running your credit score will never hurt your qualification! The bureaus log a soft inquiry that only you can see.
However, the picture muddies once you begin the process of applying for a new borrowing account. Then, some pulls will impact your score more than others.
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How Long Does It Take For My Credit Score To Update After Paying Off Debt
It can often take as long as one to two months for debt payment information to be reflected on your credit score. This has to do with both the timing of credit card and loan billing cycles and the monthly reporting process followed by lenders. However, the impact of the debt payment on your credit score may not necessarily be significant.
Types Of Accounts That Impact Credit Scores
Typically, credit files contain information about two types of debt: installment loans and revolving credit. Because revolving and installment accounts keep a record of your debt and payment history, they are important for calculating your credit scores.
- Installment credit usually comprises loans where you borrow a fixed amount and agree to make a monthly payment toward the overall balance until the loan is paid off. Student loans, personal loans, and mortgages are examples of installment accounts.
- Revolving credit is typically associated with credit cards but can also include some types of home equity loans. With revolving credit accounts, you have a credit limit and make at least minimum monthly payments according to how much credit you use. Revolving credit can fluctuate and doesn’t typically have a fixed term.
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Its Never A Good Feeling To See That Your Credit Scores Have Dropped Since You Last Checked But Being Able To Quickly Identify The Cause Can Help You Take The Right Steps To Get Them Back On Track
Credit scores can drop due to a variety of reasons, including late or missed payments, changes to your credit utilization rate, a change in your credit mix, closing older accounts , or applying for new credit accounts. And dont forget that credit report inaccuracies due to mistakes or identity theft can also cause a dip.
Lets look at the nine main reasons why your credit scores might have dropped, and how you can address each of them.
Strategies That Will Get You A Better Credit Score
Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.
Your is one of the most important measures of your financial health. It tells lenders at a glance how responsibly you use credit. The better your score, the easier you will find it to be approved for new loans or new lines of credit. A higher credit score can also open the door to the lowest available interest rates when you borrow.
If you would like to improve your credit score, there are a number of simple things that you can do. It takes a bit of effort and, of course, some time. Heres a step-by-step guide to achieving a better credit score.
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How Often Should You Check Your Credit Score
You should check your credit score regularly to check for errors, but make sure that you are doing so through soft inquiries so that your score isnt dinged. Many banks offer free credit monitoring to their customers check with yours to see if you can enroll in their service and get alerts whenever your score changes.
Hard Inquiry Or Soft Inquiry
A hard inquiry is when you applied for some form of credit in the form of revolving, installment, or open accounts. Lenders will review your credit when making their decisions to qualify you for approval. This type of credit pull will show up on your report and impacts your overall credit score. An example of this is a mortgage or auto loan.
In contrast, a soft inquiry happens when you review your credit score or a lender, like a credit card company, checks your credit for a pre approval offer. These types of inquiries do not impact your credit score.
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Does Removing Hard Inquiries Improve Your Credit Score
Yes, having hard inquiries removed from your report will improve your credit scorebut not drastically so. Recent hard inquiries only account for 10% of your overall score rating. If you have erroneous inquiries, you should try to have them removed, but this step wont make a huge difference by itself.
One Of Your Credit Limits Decreased
Similar to maxing out your credit cards, having your can increase your credit utilization ratio and negatively affect your credit scores.
Imagine, as in the example above, your total credit limit was $10,000 and you carried a balance of $3,000. In this case, your utilization ratio would be 30%. If a credit card issuer lowered your limit to $6,000, but your balance remained the same, your utilization ratio would change to 50%. This could cause your credit score to drop.
Credit card issuers set initial credit limits based on factors including your income, current debt-to-income ratio, credit history and credit score. An issuer might lower your credit limit if, among other reasons, you haven’t been using your card much or if you frequently miss payments or pay late.
You can request a from your current issuers or open a new credit card account if you’re concerned that your credit limit is too low. But know that if your limit recently went down, an increase might be hard to come by, and it may be best to wait to request more credit until your score improves.
Regardless of whether your credit limits are shrinking or your balances are increasing, keeping an eye on your credit utilization ratio will help you better understand your fluctuating credit score.
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You Have Late Or Missing Payments
Your payment history is the most important factor in your FICO® Score, the most widely used credit scoring model. It accounts for 35% of your score, and even one late or missed payment can have a negative impact. So, it’s key to make sure you make all your payments on time.
If you are more than 30 days past due on a payment, credit issuers will report the delinquency to at least one of the three major credit bureaus, likely resulting in a drop in your score. Payments that become 60 or 90 days past due will have an even greater effect on your score..
If these delinquencies are not paid, the credit issuer may send your debt to a collection agency, and the collection account will be recorded on your credit report. Records of your late and missed payments remain in your credit file for seven years, while positive payment history on an open account can stay on file indefinitely . Be sure to make all your payments on time so the record of your strong credit behavior bolsters your score for years to come.
Aim For 30% Credit Utilization Or Less
refers to the portion of your credit limit that youre using at any given time. After payment history, its the second most important factor in FICO credit score calculations.
The simplest way to keep your credit utilization in check is to pay your credit card balances in full each month. If you cant always do that, then a good rule of thumb is to keep your total outstanding balance at 30% or less of your total credit limit. From there, you can work on whittling that down to 10% or less, which is considered ideal for improving your credit score.
Use your credit cards high balance alert feature so you can stop adding new charges if your credit utilization ratio is getting too high.
Another way to improve your credit utilization ratio: Ask for a credit limit increase. Raising your credit limit can help your credit utilization, as long as your balance doesnt increase in tandem.
Most credit card companies allow you to request a credit limit increase online youll just need to update your annual household income. Its possible to be approved for a higher limit in less than a minute. You can also request a credit limit increase over the phone.
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Use Credit Monitoring To Track Your Progress
are an easy way to see how your credit score changes over time. These servicesmany of which are freemonitor for changes in your credit report, such as a paid-off account or a new account that youve opened. Also, they typically give you access to at least one of your credit scores from Equifax, Experian, or TransUnion, which are updated monthly.
Many of the best credit monitoring services can also help you prevent identity theft and fraud. For example, if you get an alert that a new credit card account that you dont remember opening has been reported to your credit file, you can contact the credit card company to report suspected fraud.