How You Can Build and Maintain Your Credit Score
Over the past few years, consumers have had an easier time tracking and monitoring their own credit scores. With free services like CreditKarma.com and WalletHub.com, people are now more capable of having an idea of how financially credible they are with the three major credit reporting agencies: TransUnion, Equifax and Experian.
These three companies collect financial information of consumers which is provided to them from financial institutions. This information is then put through different scoring models to produce a credit score for the individual. Lenders use the score to determine the “creditworthiness” of a potential client and if it is a wise decision to lend additional credit to him or her.
All the financial information about an individual is constantly updating with new information as new credit card accounts are opened, balances fluctuate and on-time payments are made. Because there are so many factors in determining a credit score, it’s possible that it can fluctuate 15-20 points in any given month. If your score drops, it could be caused by any normal changes in your credit data and should not cause distress.
These small fluctuations in credit scoring is known as “score migration.” You should only worry of a drop in your credit score if it is substantial and long-lasting. From our experience, one late mortgage payment can cause a drop from 90-120 points and the recovery can take many months or even years! When clients open a new credit card account, scores can drop but this is generally only temporarily – if good credit habits are maintained.
When a new line of credit is opened, credit scores will typically have a modest drop of 5-20 points because a new inquiry is often added, as well as the new account likely lowering the average age of credit history along with some other factors. As that new line of credit is maintained in good standing, the credit score begins to rebound due to positive payment history and the account increasing in age.
If you are routinely monitoring your own credit score, here are some tips to build and maintain a good credit score:
- Most importantly, always make sure your payments are made on-time. One 30-day late payment can dramatically affect your score in a negative way. Constant on-time payments should benefit your credit score the most.
- For existing credit card accounts, always keep your balances as low as possible (the closer to 0% the better). Even though you may get approved for a $10,000 line of credit does not mean using that credit will not hurt your score. We’ve found that your credit score can be affected negatively once you utilize more than 30% of your credit card’s limit. Sometimes, banks will decline a loan solely based on your utilization.
- If possible, try to maintain a $0 balance on credit card accounts while still actively using them. By making one-purchase a month using a credit card and then paying the full-balance when the statement arrives. This will keep your accounts active so the bank does not close them and should keep your utilization down.
- Do not apply for credit at every opportunity because it most likely will add a credit inquiry to your report each time. Having a few inquiries on your credit report should not dramatically lower your score but having many could drastically lower approval odds for new lines of credit.
- If you have no credit and are looking to build credit, our services offer the perfect solution to fast-track your credit-building. This can help you skip the typical path of beginning with a secured line of credit which can take months or even years to establish a good score. We can boost your score in a matter of weeks so you can apply for unsecured lines of credit.
In conclusion, you should not panic if your score drops 15-points – it is part of the credit-building process and your score should rebound if you practice good spending habits and maintain low balances. There are many factors that work together that will cause your score to fluctuate. By keeping your credit card balances low and active, always making on-time payments and not applying too often for new lines of credit, you should be on the path to outstanding credit!