What is a credit score, and why is it important?
Before we can get into the nitty-gritty details of boosting your credit score, let’s start with a quick refresher on what a credit score is.
A credit score is a three-digit number between 300 to 850 (with 300 being the lowest rating and 850 being the highest) that helps lenders and creditors decide if you are a good candidate for a loan or credit card. Lenders and creditors want to make sure you can pay off their loans or bills. Lending money can be risky, so it makes sense that they’d want to make sure they’re loaning money to someone with a good credit score.
A good credit score can also help you get lower interest rates on loans, which can affect how much money you pay the lender during each pay period. Higher interest rates mean you’re paying the lender more money. A bad credit score can result in much higher interest rates and possibly even being denied loans.
What affects credit scores?
1. Payment history
Payment history is the most heavily weighted item in the credit score formula because the best indicator of future behavior is past behavior. It makes up 35% of your credit score. Lenders want to know that you pay your bills on time, and every time you do so, it can increase your credit score.
On the other hand, late and missed payments can hurt your credit score and can make lenders hesitant to extend credit to you. And some missed payments can hurt you more than others. A late mortgage payment will do more harm than a late credit card payment. An account in collections can stay on your credit report for seven years.
2. Amount of money owed (credit utilization ratio)
The amount of money you owe compared to your available credit limit each month is your credit utilization ratio, and it makes up 30% of your credit score. Creditors want to know if you’re handling your credit responsibly. The higher the utilization ratio, the riskier you’ll appear to creditors. People with high credit scores typically utilize only 18-30% of their available credit.
3. Length of credit history
Your credit history comprises 15% of your credit score, and as such, people with a longer history tend to be favored by lenders and creditors. That’s why it’s crucial to start building your credit history as soon as possible. One easy way to do that is to apply for a credit card and use it for small purchases, like gas or groceries, and pay the balance off at the end of the month (or sooner).
If you’re applying for your first credit card in your twenties or thirties, it can be challenging to get approved without any credit history. A lack of credit history can result in higher interest rates or being denied credit altogether.
4. Credit mix
Credit mix is a term that refers to the different types of credit a person has, and it makes up 10% of your credit score. Lenders analyze your credit mix because they want to know you can stay current with multiple accounts at once. Here are a few examples of different types of credit:
- Rent and utility payments
- Car loans
- College loans
- Business loans
- Personal loans
- Credit cards
5. New credit inquiries
Just because lenders want to see different types of credit doesn’t mean you should apply for loans and credit cards like crazy. Almost every time you submit an application for credit, a hard inquiry (or hard pull) is made. Hard inquiries typically result in a slight hit to your credit score.
Applying to multiple lenders and creditors in a very short time can indicate financial issues, which can lead to your application being denied. Exceptions are made when people are “shopping” for interest rates on large purchases like homes and cars. New credit inquiries make up 10% of your credit score.
Can I boost my credit score overnight?
If you’re struggling to pay bills on a regular basis, it’s not going to get better overnight. Improving your credit score takes time. Sure, you’ve probably heard or seen ads making some pretty big claims:
- “Create a new credit identity legally!”
- “We can erase your bad credit, guaranteed.”
- “Improve your credit score by having us remove bankruptcies, judgments, and debt from your credit history!”
Scammers often make these claims. You cannot erase your credit score or get a new credit identity legally. According to Credit Karma, you may have to wait ten years for a Chapter 7 bankruptcy to drop off your credit report. A Chapter 13 bankruptcy can take seven years.
There is no quick fix to bad credit scores, period. Save your money, and don’t fall for these credit repair scams. Instead, report these businesses to the FTC and focus on improving your credit score first.
How long does it take to improve a bad credit score?
It can take months and even years for a bad credit score to improve. Your experience will depend on why your credit score is low and if you’re currently staying on point with the factors listed above.
CNBC reported that it could take an average of three months for your credit score to recover from maxing out a credit card, 18 months for a missed payment, and 5-10 years for bankruptcy.
Fortunately, there are steps you can take to speed up the process. The fastest way is to pay off large credit card balances and ask for increased credit limits. Both of these steps will improve your credit utilization ratio.
I can’t wait that long for a loan — what can I do?
If your credit score isn’t where you want it to be, and you really need a loan, you still have options. LoanStream works with lenders from all over the country to help find a loan that will work for your financial situation.
In less than five minutes, you can complete our online request form and be connected to our lender network. LoanStream does not do a hard pull on your credit, and regardless of your situation, we’ll work hard to find you a lender that fits your needs.
Get connected to our network now by submitting an application through LoanStream.