How to Improve Your Credit Score
Every person is a multifaceted individual who faces unique struggles. Many consumers have overcome significant obstacles in their lives, some of which have knock-on financial consequences.
Fair or not, your credit “worthiness” is distilled down to a three-digit number that represents the totality of your financial existence – in the eyes of lenders at least.
Unfortunately, there are a several aspects of modern life that are dictated by this three-digit number, whether it’s qualifying for an auto loan, getting a good apartment or purchasing a home. Virtually everyone has an incentive to improve their credit rating or maintain it at high levels.
How Credit Score Is Calculated
Your History of Debt Payments (35 percent): The most important factor in the credit score calculation is payment history. Missing payments or late payments will have the most deleterious effects on your credit score.
Credit Utilization (30 percent): Many consumers don’t realize just how important credit utilization (the percentage of your available credit lines currently used) is to the credit score calculation. In other words, having three maxed-out credit cards will have a significant negative effect on your credit score.
Length of Credit History (15 percent): Lenders like longer credit histories as it demonstrates consistent (preferably good) financial behavior over time.
Debt Mix (10 percent): Having a mix of credit lines, like a credit card, car loan and mortgage, can have a positive impact on your overall credit rating. This may seem a little counterintuitive as you may have heard financial experts preach that relying on loans to cover purchases is fundamentally bad. The credit rating agencies don’t necessarily agree. As long as you’re maintaining a healthy credit utilization rate and are making payments on time, having several loans or lines of credit is good.
New Credit Inquiries (10 percent):Hard pulls (or hard inquires) of your credit report can negatively impact your credit score – but it’s one of the lesser factors. Having one or two when you’re shopping for a mortgage likely won’t have long-term consequences, but a half dozen new credit inquiries in quick succession may indicate a borrower with maxed credit is desperately seeking a new line.
Collections (Wildcard): Maybe the most catastrophic of the negative factors – and the one that doesn’t apply to everyone – are collection actions. These can range from bankruptcies and foreclosures or repossessions to other collection methods like wage garnishment due to chronic missed payments. These types of marks can stay on your credit history for years.
Steps to Improve Your Credit Score
Review Your Credit Report: Check for errors and dispute them if necessary. Mistakes on your report can unfairly lower your score.
Pay Your Bills on Time: Set up automatic payments or reminders to ensure you never miss a due date.
Reduce Credit Utilization: Try to keep your credit utilization below 30 percent. This means if you have a $30,000 limit on all your credit cards combined, carry no more than $10,000 on them at any one time. Paying off high-interest debts first (especially credit card debt) can help you accelerate credit utilization improvements.
Avoid Unnecessary Credit Inquiries: Apply for new credit only when necessary to avoid multiple hard inquiries.
Build a Long Credit History: Keep your oldest accounts open, even if you don't use them often, to maintain a longer credit history.
Seek Professional Help if Needed: Consider working with a credit counseling service if you're struggling to manage your debts. Members of OnPath Federal Credit Union have access to exclusive credit and financial counseling and education resources.
Set Realistic Expectations: Understand that there's no magic bullet for improving your credit score overnight. It may take several years of diligent effort to see substantial improvement.
Monitor Your Progress: Regularly check your credit score to track your progress and adjust your strategies as needed.
Understanding the Time Frame
Many of these steps are manageable, even for households on a tight budget. Borrowers do need to be realistic and try not to get discouraged. Slow progress is not necessarily an indication that your efforts aren’t working. The rate at which your credit rating improves will be based in part on the severity of the underlying credit problem:
- Minor Issues: If you're correcting small errors or working to reduce credit utilization, you may see improvements within a few months.
- Major Issues: Bankruptcies, foreclosures or significant delinquencies can take several years to recover from.
It's essential to remain patient and consistent in your efforts. Your credit score reflects your financial habits over time, and significant improvement requires a persistent and thoughtful approach.
You Deserve a Financial Advocate in Your Corner
At OnPath Federal Credit Union, we take pride in being the local New Orleans partner businesses and individuals can rely on for exceptional banking services and financial help. In addition to great loans with competitive rates and terms, members also have access to exclusive perks like financial education seminars and credit counseling. We’re ready to partner with you on a credit-enhancing plan of action. Call us at 800.749.6193 to learn about membership.