April 23, 2021 Cody Marchant

How to Improve Your Credit Score

Your credit score is a measurement of your financial responsibility. The greater your credit score, the more types of mortgages you will qualify for.  

Credit scores are not permanent and can be turned around. If your credit score is poor or not where you want it to be, you can work to improve your finances! We had our experts at Loan Compass, break down 5 easy ways to improve your credit score. 

Let’s get to it!

What is a Credit Score?

Your credit score is a numerical grade of your creditworthiness. Your score typically falls between 300 and 850; any score below 579 is seen as poor, scores over 670 are considered good, and anything over 800 is seen as excellent.

Credit scores are a quick overview of where you stand when wanting to make a larger purchase. There are a few different types of credit scores, but the two most popular are FICO and VantageScore. 90% of lenders use your FICO score when making lending decisions because FICO analyzes scores from the 3 major bureaus: TransUnion, Equifax, and Experian.

How Credit Scores Are Calculated

Credit scores are calculated using 5 key factors. 

Payment history (35%)

The largest part of your FICO score is based on your payment history. Lenders want to see that you have a steady history of making payments on time to other debts like credit cards.

Credit utilization (30%)

Credit utilization, also known as amounts owed, is the amount of credit you have used compared to how much credit you have been given by a lender. It’s okay to have several credit accounts open but owing too much money on them will negatively impact your score. Ideally, you want your credit card usage to be below 30%.

Length of credit history (15%)

Length of credit history is often a small factor many don’t consider when trying to improve their credit. Accounting for 15% of your FICO score, the age and activity level of your accounts does matter to your score – so don’t cancel your credit cards if you no longer use them!

New credit opened (10%)

New credit opened can lower your credit score. If you are considering buying a home within the next 6 to 12 months you should refrain from applying for multiple lines of credit at once. Having too many hard credit inquiries will negatively impact your score, but shopping for a mortgage across multiple lenders will not.

Diversification of credit (10%)

Having a healthy diversification of credit and loans lets lenders know you’re able to manage different types of credit cards. It shows that you’re responsible enough to handle a variety of loans in different amounts.

What is a Good Credit Score?

As previously mentioned, credit scores that are considered good start at 670. But ranges vary depending on the credit scoring model. Typically, this is what a good credit score looks like:

    • Excellent: 800+ 
    • Very Good: 740 – 799 
    • Good: 670 – 739 
    • Fair: 580 – 669  
    • Poor: <580

The higher your credit score, the more loans you will qualify for. Different loans have different required credit scores in order to get approved. For example, the minimum FICO score to obtain a conventional loan is 620, an FHA loan with 3.5% down is only 580, and a VA loan approximately 620. 

Note that these numbers vary depending on your lender but can be used as a rough estimate of what to expect from the majority of lenders. 

Credit Score5 Effective Ways to Improve Your Credit Score

There are many ways to improve and optimize your credit score. If you can stick to these steps your credit score will improve over time. 

1. Pay on time

Late payments are the number one factor of a poor credit score. A simple way to avoid this is to set up automatic payments or set a reminder on your calendar. 

2. Cut your Credit usage

Lenders don’t like seeing you use 90% of your available credit. Maxing out a credit card is never a smart decision; only spend a portion of your credit limit, don’t overspend. 

3. Consistency 

Keep one card in good standing for many years and keep a small balance on it that you consistently pay off. Use your credit card for essentials like gas, groceries, utilities and other fixed expenses. 

4. Multiple lines of credit 

Having more than one line of credit can help improve your credit score faster. Paying off student loans or car loans is another way to build your credit on top of a credit card. 

Opening a second credit card will lower your score temporarily so if you are seeking out a loan soon, it’s best to hold off. 

5. Don’t close credit card accounts

Closing a credit card account can hurt your credit score. If you want to get rid of a credit card just take some scissors to it so you can’t use it anymore but keep the account itself open. 

Start implementing the above strategies ideally 60 days prior to your lender pulling your score to give time for your score to increase significantly.  A few points could be enough to put you into a new lending category – decreasing your interest rate or down payment. 

If you want to learn more about how to optimize your credit score, we can help. Speak with an experienced loan officer to find out your credit score and which loans you qualify for.