Time to Fix Your Credit Score? Here are 12 Expert Answers to Get You Started
Learn more about your credit score, credit report, and the best ways to improve your creditworthiness.
For a being such a dinky little three-digit number, your credit score sure has the power to shape your life. It determines how much your loans and credit cards are going to cost you, not to mention it can decide whether you have access to (traditional) credit at all!
We know you’ve got questions about how it all works—especially when it comes to raising your credit score. But before you fix your score, you’ve got to learn a bit more about what makes it tick. And, in particular, you’ve got to learn more about your credit report. Without it, you wouldn’t have any credit scores at all!
That’s why we reached out Rod Griffin, Director of Public Education for Experian (@Experian), one of the three major credit bureaus. He gave us some great pieces of expert insight into how credit scores and credit reports work and how you can use that knowledge to improve your credit.
You’ve got questions? He’s got answers.
1. Is your credit score part of your credit report?
“There are two things to keep in mind about credit scores, says Griffin, “there isn’t just one credit score and it is not part of your credit report.”
Are you surprised?
Credit scores use the information kept on credit reports to determine your creditworthiness, but the score isn’t actually a part of the report itself. Information can vary between the three major credit bureaus—Experian, TransUnion and Equifax—so you have different scores depending on which credit report is used.
And that’s not all.
“In fact,” adds Griffin, “there are many different credit scores used by lenders to meet their particular risk management needs. Each scoring model weighs credit indicators differently.”
Figuring out your credit score might be a little harder than you originally thought—but that doesn’t mean there aren’t common “best practices” you can follow to keep all your scores healthy.
2. What are the most important factors in a person’s score?
Griffin says that “Missed/late payments are the most important factor in credit scores.” And that makes sense, as your payment history makes up 35 percent of your score, more than any other single factor.
According to Griffin, those late or missed payments “may appear as negative information on your credit report for seven years, but their impact on a person’s credit score will decline over time.”
But he adds that “depending on the severity of the delinquency, they can affect scores for as long as they remain on the report.”
3. How long do new credit inquiries stay on your report?
Whenever you apply for a loan or a credit card from a traditional lender, they’re going to run a “hard” credit check. These get recorded on your report as “new credit inquiries.” Basically, lenders want to know any time you’re searching for more credit than you already have.
“While inquiries remain on a credit report for two years, their impact on credit scores is minimal and diminishes relatively quickly, says Griffin. “Typically, any significant impact from inquiries diminishes after two or three months, by which time a new account will appear in the report, or not.”
“The new account – or lack thereof – represents the risk and the inquiry becomes much less significant. FICO excludes entirely any inquiries more than 12 months old from their score calculations. Inquiries for car loans or mortgage loans are counted as only one inquiry by most credit scoring models and may be not counted at all in the newest systems from FICO and VantageScore.”
He adds that “Inquiries will always be the least important factor in credit scores.”
4. How do debts sent to collections affect your score?
If you fail to make a payment on one of your credit accounts, it’s going to get sent to collections—which oftentimes means that your lender (or “creditor”) sells the debt to a new company for a fraction of what you actually owe. That company, a debt collection agency, then tries to recoup the debt, while the collection account gets recorded on your report
According to Griffin, “The collection account will remain on your credit report for seven years from the date the original creditor first reported the debt as delinquent to the credit-reporting agency. That’s true even if the collection account has been transferred from the original creditor to one or more collection agencies.”
“Although collection accounts stay on the credit report for seven years, the longer ago they were paid off, the less of an effect they will have on your credit scores.”
“A collection account that has been paid in full is often viewed more favorably by lenders than if left unpaid, especially after some time has passed. In fact, some newer scoring models no longer include paid collections when calculating scores, so paying off a collection could benefit credit scores even sooner,” he says.
A collection account is one of the ways that no credit check loans like payday loans or title loans can get recorded on your report. Even if the lender doesn’t report your loan to the credit bureaus, a debt collector will report their collection account. In cases like these, bad credit loans will only hurt your score, not help it.
5. How long does a bankruptcy remain on your report?
“There are two main forms of bankruptcy, chapter 7 and chapter 13,” says Griffin. “Chapter 7 bankruptcy remains on your credit report for 10 years after the date filed. Chapter 13 bankruptcy remains on your credit report for 7 years after the date filed.”
“Bankruptcy is the most serious negative factor in a credit report. The exact point impact depends on the individual’s unique credit history and the credit scoring system used to calculate the score. Regardless of those issues, a bankruptcy will have very serious negative implications for credit scores while it remains on the credit report.”
We agree. While bankruptcy is sometimes a person’s only solution, the effect on your credit score is … well, it’s not going to be pretty. We can promise you that much.
6. How long does it take for on-time payments to positively affect your score?
“Everyone’s credit history is unique, and there are many different scoring systems, so there’s really no one-size-fits-all answer,” says Griffin.
“Payment history is the number one factor in determining credit scores. Therefore, consistent on-time payments for one year or even three years will positively impact a person’s score because it shows you are responsible. The longer the history of on-time payments, the more positive the impact.”
But making on-time payments won’t fix your score all by itself.
“For example,” offers Griffin, “credit usage is the second biggest factor in credit scoring models. If someone is making consistent on-time payments, but their credit card balances are creeping closer and closer to their limit each month, the higher balances could offset the impact of the positive payments on their score.”
And if you’re looking for instant results from an on-time payment, you’re going to be disappointed. According to Griffin, “Credit scores also require a minimum of three months, and more typically six months of payment history before they can be included in the credit score calculation.”
7. Is there a certain credit utilization ratio at which a person will see their score jump?
Your credit utilization ratio sounds complicated, but it’s actually pretty simple. It measures how much of your available credit you’re using.
Say you have a credit card with a $1,000 limit on which you’re carrying a $500 balance. Your credit utilization ratio would be 50 percent, as you are currently using half of the credit that’s available to you.
“A general rule of thumb is to always keep your utilization rate below 30 percent,” says Griffin, adding that “Ideally, you should pay your balances in full each month.”
He stresses that “The 30 percent ratio is a maximum, not a goal.” So if your ratio is currently above 30 percent, it certainly makes a good milestone to shoot for. Just make sure you don’t stop paying down your balances once you’ve achieved it.
“Credit scores consider both your overall balance-to-limit ratio, or utilization rate, and your utilization rate on individual accounts. The credit limit of an account is important because it is part of what determines your utilization ratio—the amount of credit you’re currently using vs. the amount that is available to you.”
This is one of the reasons why closing down an old credit card can actually hurt your credit. It lowers the amount of credit you have available to you, which in turn hurts your ratio. Instead of closing that account, you should consider keeping it open—so long as you aren’t tempted to use it.
To learn more about your credit utilization ratio, check out our blog post, Know Your Credit Score: Amounts Owed.
8. Do people’s scores get penalized for using zero percent APR balance transfers to help with debt repayment?
“Opening a new credit account often means taking on new debt, or at least increasing your potential to incur debt,” says Griffin. “For this reason, you may see a slight dip in scores when you first apply for and open a new account. The action of opening the new account would not cause you to be penalized for using a zero percent APR balance transfer to help with debt repayment.”
“However,” he adds, “there are other pitfalls that may affect your credit score.”
- “For instance, a high transfer fee could outweigh the benefits you might get from a lowered or zero percent APR.”
- “Another downside is that if you fail to pay off the entire transfer amount by the end of the promotional period, your APR will reset to a higher rate – one that could potentially be higher than you were paying before making the transfer.”
- “And lastly, if you continue to use the paid-off card, you could accrue even more debt. It’s important to avoid adding more debt – either on the old card you’ve paid off or on the new card with lower or zero percent APR.”
To learn more about balance transfers, Griffin recommends that you check out this article from Experian.
9. How does the length of your credit history affect a person’s creditworthiness?
“The length of credit history helps lenders evaluate your creditworthiness,” says Griffin. “Credit history gives lenders a better insight into your credit behaviors, thus, determining lending risk and not really a fuller picture of how you manage your debts.”
“In general, the longer your accounts have been opened, the better it can be for your credit history, as long as you manage them well. “
“Though, in terms of creditworthiness having a line of credit for one to three years is only positive if the account is managed well. It’s quite possible for a person with a credit history that is only a few years old to have very good credit scores,” he says.
10. Is it easier to go from bad to fair credit than it is from fair to good credit?
According to Griffin, “Moving your credit score up the scale regardless of where you start requires the same behaviors. You have to catch up on any late payments, reduce your credit card balances and always pay your bills on time”.
“Just how fast any individual’s scores will improve depends on their unique credit history. The more severe the issues, the longer it will take.”
“For example,” he says, “a person who is just beginning to build their credit history but has all positive, on-time payments may increase their score faster that a person whose scores have been dragged down by bankruptcy. The bankruptcy filing will seriously hinder scores for as much as 10 years, especially if coupled with other late payments, charged-off accounts or collections. It also depends on the scoring system and how it weighs the individual items.”
The bottom line for Griffin is that “everyone has a unique credit history with a different mix of factors that will determine how fast their credit scores may increase.”
11. If someone is committed to raising their credit score, what is the best course of action for them take?
According to Griffin, there are two things that a person should do if they want to raise their score:
1. “If you have late payments, catch up and then make all your payments on time, every time.”
2. “Reduce your credit card balances. Payment history and revolving account utilization are the two most important factors in credit scores.”
“Beyond those two things,” he says, “every credit history is different, and the things that each person should do differ as well.”
“To find out what you need to do, get a copy of your credit report and purchase a credit score. When you purchase your credit score you will receive a list with the risk factors that go with that score. The risk factors tell you what, from your personal credit history, are most affecting your credit score. Address those risk factors and all your scores should get better.”
“The numbers can be different from one scoring system to another, but the risk factors are very consistent,” says Griffin.”
12. How can I get a copy of my credit report and score?
Here’s some great news: Did you know that you are entitled to one free copy of your report from Experian, TransUnion, and Equifax ever year? Well, you do! It’s the law! All you have to do is request them by going to www.annualcreditreport.com.
As for your credit scores, the FICO score is the most commonly used type of score, but there’s also the VantageScore, which was created by the three bureaus.
“You can purchase a VantageScore from Experian when you request your free annual credit report,” says Griffin. “You also can get a free credit report and free FICO credit score at www.freecreditscore.com.”
“In both cases,” says Griffin, “you get the number, an explanation of what it means in terms of risk and the list of risk factors that most affected the score. The risk factors are empowering because they tell you what you can do to make your scores better.”
|Rod Griffin is Director of Public Education for Experian (@Experian). Rod oversees the company’s financial literacy grant program, which awarded more than $850,000 in 2015 to non-profit programs that help people achieve financial success. He works with consumer advocates, financial educators and others to help consumers increase their ability to understand and manage personal finances and protect themselves from fraud and identity theft. He works to help all consumers be better prepared to get the credit they need, at the time they need it, and at rates and terms that are favorable to them.”|