The 5 Secrets to Boosting your Credit Score

Brennan McCarthy, CFP®

Your credit score plays a crucial role in your financial life. Whether you’re applying for a loan, renting an apartment, or even getting insurance, lenders and businesses use your credit score to assess your creditworthiness. But how exactly is your credit score calculated? Let’s break it down into five essential factors and explore some practical tips to improve your score.

1. Payment History (35%)

Your payment history is the most critical factor in determining your credit score. It accounts for a substantial 35% of the overall score. Here’s what you need to know:

Consistency Matters: Make sure you pay your credit card bills, loans, and other debts consistently and on time. Late payments can significantly impact your score.
Set Up Auto Pay: Consider setting up automatic payments for your credit cards and loans. This ensures you never miss a due date.

2. Amount Owed (30%)

The amount you owe relative to your available credit is another significant factor. It contributes 30% to your credit score. Here’s how to manage it:

Credit Utilization: Aim to keep your credit utilization below 30%. This means using no more than 30% of your available credit. High utilization can negatively affect your score.
Pay Down Balances: If possible, pay off credit card balances before the reporting date. Keeping balances close to $0 when the agencies receive the data can give your score a boost.

3. Length of Credit History (15%)

The longer your credit accounts have been open and in good standing, the better. Here’s why it matters:

Avoid Closing Old Accounts: Even if you don’t use them frequently, old credit cards contribute positively to your credit history. Closing them prematurely may lower your score.

4. New Credit (10%)

Applying for new credit can impact your score. Be mindful of the following:

Credit Inquiries: Each time you apply for credit (such as a loan or credit card), it results in a hard inquiry. Too many inquiries within a short period can lower your score.
Limit New Applications: Apply for new credit only when necessary to avoid unnecessary dings to your score.

5. Credit Mix (10%)

Having a diverse mix of credit types can enhance your score. Consider the following:

Variety Matters: A healthy credit mix includes different types of debt, such as mortgages, auto loans, student loans, and credit cards.
Prove Your Ability: Regularly making payments across various credit accounts demonstrates your creditworthiness.

Remember, your credit score reflects your financial responsibility. By understanding these factors and implementing smart strategies, you can take control of your credit health. Keep your debt manageable, pay on time, and maintain a balanced credit mix. Your financial future will thank you! 🌟