If you’re reading this, we want you to know that you’re not alone! Inflation has pinched everyone’s budget, and more people are turning to credit cards to pay bills, cover rent, and put food on the table. As credit use increases, American’s credit scores are going down. It’s frustrating, and it might have you shouting “Help me fix my credit score!”
JPAL Mortgage is here to assist you! We’re going to talk about the different parts of a credit score and provide some tips that will get you moving in the right direction. Keep in mind that your score won’t change overnight. It will take time and some discipline, but at the end of this journey you’ll be on the right track to financial fitness!
Credit Tips and Tricks
First, let’s take a look at how credit scores are calculated. This chart from Experian breaks down the calculations for us.
MyFico is another great source of information. Let’s take a closer look at what all this means for you.
This is the biggest contributor to your credit score, and it’s straight forward – pay your bills on time and you’re all good. The opposite is also true. If you don’t pay your bills on time your score will be lower, even if everything else is rock solid.
JPAL’s Tip: Pay your bills on time, it’s as simple as that. Creating a budget helps!
This one can be confusing. Generally speaking, you don’t want to use more than 30% of your available credit.
For instance, if you have a credit card with a $1,000 limit, you want a balance of $300 or less. With a $10,000 credit limit, you would want to keep your balance under $3,000. It’s not the amount that matters. It’s the percentage of the total that counts. The smaller the percentage of use, the better your credit score.
Once you start going over 50% – in our example, a balance of $500 or higher with a $1000 credit limit – your score will start to decrease.
You will hear this referred to as “credit utilization rate.”
JPAL’s Tip: Start paying down balances on your credit cards. This Debt Snowball Calculator is a great place to start.
Length of History
Fortunately, this one only counts as 15% of your score as there’s not much you can do here. The longer you have a credit card or line of credit, the more it will contribute to this part of your score.
That said, the one thing you can do is keep your older credit cards open!
It may be tempting to close them, especially if you’re not in use, but doing so could cause your Length of History to go down. Additionally, if you have balances on other credit cards and you close down a zero balance card, your credit utilization rate will go up, and you could score lower in the Amounts Owed portion. It’s all tied together!
This one is a bit tricky. We don’t recommend keeping cards open that you do not monitor as that could open you up to fraud. If you forget about a card and the number is stolen, you may not notice it until it’s too late. So make sure to keep an eye on all your open credit cards.
JPAL’s Tip: Keep your older credit cards open (unless you are not monitoring them).
Credit mix looks at the types of credit you have: credit cards, auto loans, mortgages, lines of credit. The more types of loans you have, the better your credit score (if you’re making payments on time). As 10% of your score, don’t worry about this one.
JPAL’s Tip: Don’t worry about credit mix!
Opening new credit lines can hurt your credit score. It’s not by much, but there you have it. Why does opening a new credit line hurt your score when that’s what the credit companies want you to do with the credit score they’re giving you?
Because if you’re opening new credit at a rapid pace, that could be viewed as risky situation – needing large amounts of credit to pay bills, etc.
JPAL’s Tip: Generally speaking, it’s best not to open new credit lines when preparing to get a new mortgage. It can increase your Debt-to-Income and lower your credit score.
Fixing Your Credit
Remember that everyone’s credit is a bit different. Your credit score will adapt to where you are within your credit journey. It’s impossible for anyone to say, “Do X and your credit score will increase by Y.”
Stay away from anyone that claims they can fix your credit overnight. There are a lot of scammers out there who prey on good people who want to do the right thing and improve their lives.
While it’s impossible to gauge specific score changes, we can help you figure out how simple changes will affect your score in the near term. It’s not magic – it’s algorithms!
A low credit score can make you feel like home ownership is out of reach. It’s simply not true! There are millions of people in the same position as you. The difference comes down to what you do right now. You can start taking small steps today to improve your credit score and brighten your financial landscape. JPAL Mortgage is here to help! We know that a house is more than wood, concrete, and bricks – it’s a place of safety and comfort where your family can grow and thrive. It’s your home. We love creating credit plans, seeing credit improve, and celebrating the savings as a result. It’s a blast! Let’s chat if any of this resonates with you.