Credit scores affect a lot of things in our life, and it reaches as far as determining our insurance rates! It has been statistically proven that people with higher credit scores will have fewer claims, so almost all insurers use your credit score in determining your rates. However, increasing your credit score isn't as straight-forward as you might think. That’s why we've listed a few tips on less-known ways your credit score is affected, and strategies you can use to increase your score!
Ratio of Debt:
When using credit cards, you want to use between 5%-30% of your total credit each month. Having more or less will negatively impact your score (yes, you can be penalized for not using enough credit!).
The total credit is the cumulative amount of credit lines you have. So if you have three credit cards (store-issued credit cards count too!) all with a $1,000 limit, you have a total credit limit of $3,000 a month. Using any combination of the cards to accumulate between $150-$900 that month will positively affect your credit score.
Payment History and Ratio of Debt make up approximately 65% of your score. Payment history is a record of all payments made on your debts. Timely payments stay on your record forever, while missed/late payments stay on record for approximately 7 years. When a late payment is initially reported, it can reduce your score by (up-to) 60 points!
Whenever you apply for debt (a credit card, loan, mortgage, etc.), the debtor will make a hard credit inquiry. Each hard credit inquiry on your record will decrease your score approximately 3 points. Soft credit inquiries are when you check on your credit score yourself, say through www.credit.com or www.creditkarma.com. Soft credit inquiries have no effect on your score. All inquiries stay on your record for 2 years, however.
Length of Credit History:
This part makes up approximately 15% of your score, and can only be improved by the passage of time. The Length of Credit History starts with the very first line of credit you have, oftentimes a loan or credit card.
The best thing a young person can do is get a credit card (and manage it responsibly!) as soon as possible. A co-signer may be needed initially, but can later be removed with proof of sufficient income.
For older persons, closing an old account may have a negative affect on their score, because closing a credit line erases all credit history associated with it. If you have an old card you don't use anymore, it's often better to just keep the card open, but just not use it.