Credit scores may be shrouded in mystery, but the impact they can have on your financial bottom line is very real. Higher interest rate products can cost you tens of thousands in extra fees over your lifetime. Proactively staying on top of your credit score (and knowing the biggest culprits that can hurt it) can help make you eligible for lower interest rates and save you big time cash.
All the different actions that can affect your credit score aren’t weighted equally. Certain things make a bigger difference, while others are less important. This doesn’t mean you shouldn’t keep an eye on all of them, but understanding where the most drastic impacts are coming from can help you manage your score and decide what to focus on to make yours rise as fast as possible.
The major stuff
These are the big guns when it comes to your credit score. Following good habits here will give your score the biggest lift or, on the other side of the coin, this is where bad habits will hurt you the most:
1. Payment history
This is a fundamental part of credit history that most people are commonly aware of. Paying your bills on time is a cornerstone of a solid credit score. This applies to all of your bills, not just credit cards and loans, so make sure that all accounts registered in your name — including utilities, internet, mobile phone, insurance, etc. — are being paid by their respective due dates.
While it’s true that making minimum credit payments will fulfil your obligation to keep up your payment history, it can hurt you as well depending on your overall credit utilization. Which brings us to #2:
2. Credit utilization
Lots of folks focus on paying on-time minimums as key to maintaining their score. While it’s definitely crucial, you also need to keep an eye on your credit utilization. That means how much of your total credit you’re using on a regular basis.
Lenders want to see that you know how to manage what you have. If you’re constantly maxing out your credit cards — even if you pay the minimum each month — that’s a red flag that you’re not able to manage your overall credit in a healthy way.
Credit bureaus look at both your total amount of credit and the amount on each individual account:
● Total credit
Add up the total amount of your available credit, including credit cards, loans, and lines of credit. That amount is your 100%. To get a credit score boost for utilization, you want to be reported for between 10-30% of what you have available. That means having the balance owing on each month’s bill no more than 30% of your total available credit, and, to be safe, aim for around 20%.
● Individual credit on each account
At the same time, if you have two credit cards and one is used at 30% and one is at 60%, this will hurt your score. You’ll want to make sure that each individual credit account is between 10-30% as well as your overall credit utilization for all of your accounts combined.
If you can manage them responsibly, raising your credit limit or having more than one credit card can help you keep your overall credit utilization at or under 30% but be very careful. For lots of people, adding extra credit is a slippery slope. If 10% is ok then it might seem like 0% is even better, but you’d be wrong. Especially when you’re building a credit history, lenders want to see some monthly behaviour on your account (just not less than 10% or more than 30%). Make sure you’re using each credit account every month and not letting them sit there at $0.
3. Duration or history
Credit scores are a long game. While it can be a smart idea to cancel credit accounts you’re not using if you’re trying to consolidate debt or remove temptation to overspend, closing off your oldest account can potentially lower your score.
The next time you check your credit report, note which of your accounts is the oldest with the longest history. This is the one you want to maintain and keep up to date for its positive impact on your credit score.
The small(er) stuff
These actions are still important to keep an eye on, but won’t make as big a difference in your score as the major stuff. If you’re already doing the big things and want to get an even better score, focus on these. If you’re trying to build up a low score, make sure you’ve got the major section above tackled before you worry about these tinier things.
1. Total hard inquiries in the past 2 years
There are two types of “inquiries” that companies will make when you’re applying for a credit or service:
● Hard inquiries show up when you apply for credit products, loans, or some utilities. This means the company looked into every detail of your credit score and history to verify if they want to open an account for you. Hard inquiries impact your credit score so you want to watch out for how many of them you add up.
● Soft inquiries happen when you’re checking your credit score through third-party accounts like your bank or credit score, applying for insurance, or checking to see which type of credit card or loan you might be pre-approved for. Soft inquiries don’t show up on your credit score, so feel free to do as many of them as you want.
Before you check anything related to your credit score, make sure whether you’re starting a hard or soft inquiry, and limit the number of hard inquiries you begin.
Applying for too much credit in too short a period of time is a big no-no. It tells potential lenders that you’re either desperate for credit, or trying to add up numerous accounts that you might not be able to cover payments for.
While credit bureaus don’t list official guidelines for how many hard inquiries could damage your score (that would just be too easy) the general rule of thumb is to keep it to fewer than six within two years. After two years, hard inquiries drop off your credit report.
2. Accounts opened in the past 2 years
Similar to #1 above, lenders want you to have credit accounts and history that they can see you reporting on, but at the same time they don’t want you to open too many accounts all at once.
Don’t apply for credit frivolously or without a reason. Most people don’t need more than one or two credit products, particularly when they’re trying to build up their credit score.
3. Credit diversity
A mix of different types of credit accounts shows that you can handle different payment structures and balance your financial commitments. Aim for a few types of recurring accounts — like a credit card — along with a fixed account, like a fixed-rate loan or auto loan.
To fully take advantage of these credit-boosting tips, you want to know your score and regularly monitor it to see if you’re improving. There are lots of up-and-coming companies making it easier (and free!) for Canadians to access and monitor their credit score. Check out Borrowell to get started.
Jeremy Elder is a Toronto-based content marketer and copywriter with over a decade’s experience telling stories for some of the world’s biggest brands. He’s an expert at finding WiFi wherever you least expect it.
Jeremy Elder is a paid Sonnet spokesperson.