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Everything You Ever Wanted to Know about Your Credit Rating

Your credit rating is an important metric that can determine not only your ability to secure loans or other financing but also your ability to rent a home or apartment or even how a potential employer views you. Although most people understand that credit scores matter and it’s beneficial to raise their score, the process for accomplishing that can be confusing and opaque.

If you’re interested in seeing your credit scores climb but aren’t sure what is used to calculate them or how to raise those metrics, don’t worry. With this guide you can learn all the key areas credit reporting agencies measure, how important each is when calculating your score and what you need to do to raise your performance.

Payment History

There are three primary drivers of your credit score which have the most impact on your overall rating. The first of these three is your payment history. This applies not only to your credit cards but also to any other loan or financing accounts that report to the credit scoring agencies. Any payment that is over 30 days late will result in a negative mark on your payment history, and it only takes a few late payments to significantly harm your score.

Although you cannot immediately recover your payment history scores if you have a history of missed payments, your history does not remain on your score forever. If you can get into the habit of making all of your minimum payments on time, the missed payments will move farther back in your history until eventually, usually after seven years, they are moved off. Making at least your minimum payments is key, so when in doubt you should err on making just the minimum on all accounts over making one big payment to a particular line of credit.

Credit Card Utilization

The next major factor in your credit score is the percentage of your available credit card space that you are using. There is an important distinction as credit such as loans or a mortgage are not factored into your utilization numbers. Although it is not required to have your credit cards zeroed out, to get the maximum benefit from your utilization rating you should keep your credit card usage below 30-percent.

Because the size of your credit card debts has outsized importance for your credit score, focusing your debt reduction on credit cards first is usually the best strategy if you are seeking to raise your score. After allocating the minimum amount needed to make your base payments to each of your creditors, you should then focus on any additional payments you can afford to pay off the credit card with the highest interest rate. This will reduce your overall credit card utilization and also minimize the amount of new debt you take on as a result of interest.

Derogatory Marks

The final major factor which plays a big part in your overall credit score is the presence of any derogatory marks on your credit report. A derogatory mark occurs when you default on a line of credit or the agency holding the line of credit puts it into collections, and it can have a significantly harmful effect on your score.

As with missed payments, the best plan is to never have a derogatory mark make it onto your report, but if you have existing marks you can still clear them with responsible bill paying. You should make avoiding collections a priority. In a worst-case scenario if forced to choose between a late payment on one account and defaulting on another you should opt to avoid the derogatory mark, especially as it is likely any defaulting agency has significantly harmed your late payment rating already. Ideally, however, you should contact the agency placing the claim against your credit and seek out a payment plan that you can afford and that avoids receiving the mark.

Credit History Age

Although the three major indicators have the biggest impact on your score, the other factors can still be important and you should still aspire to improve them. When you are first starting your credit, your lack of prior credit history can act as a drag on your ability to raise your score, as agencies want to see a long history of good behavior.

While you cannot manufacture credit age, there are two important steps you can take. First, if you do not have any open lines of credit you should seek out a creditor, such as a low limit or secured credit card, then apply and use it responsibly to start building your credit history, payment history and low utilization. If you have existing cards or loans which are not on your report and in good standing you should also contact the creditor to request they report to the agencies as this can instantly expand your credit history significantly.

Total Accounts

Just like having a long credit history shows your reliability more, so too does having more accounts in good standing. While it is not essential to have many accounts, it can provide a boost to your score. While you should not simply apply for a bunch of credit cards to raise your accounts, and you’ll learn more about why in the next section, you can raise your overall accounts by keeping paid off credit lines open. When you zero out a card, don’t cancel it. Instead, just stop using the card or make one purchase and pay it off each month. Not only does this raise your total accounts, but it also lowers credit utilization by providing the full available line as unutilized credit.

Hard Inquiries

The final concern on your report, and the reason to not open too many accounts at once, is that an excessive amount of hard inquiries in a short period harms your score. This also makes knowing your score more difficult as you only can receive one free annual report without a hard inquiry. Fortunately, most tools for managing credit track your score without hard inquiries so you can stay updated without harm.

Raising your credit score can feel insurmountable, but it can be done. By making smart decisions now you can raise your score significantly in the months and years to come.

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