What Lenders Want to See in Your Credit History
As you build your credit history, you might wonder what lenders are looking for in a creditworthy customer. Although there is no hard and fast rule, since each lender has their own underwriting process, the breakdown of a credit score gives us insight into the most important characteristics that lenders generally want to see when evaluating your credit profile.
Payment History
Payment history accounts for 35% of your credit score. In other words, on-time payments represent a critical component of your credit score. Lenders want to feel confident that you make it a priority to repay your debts so that they will not incur a financial loss by extending credit to you.
Even one missed payment can make a serious dent in your credit score, so do not take this category lightly. Making your payments on time 100% of the time is the most important thing you can do to earn a good credit score.
Credit Utilization
Your credit utilization rate represents 30% of your credit score. Your credit utilization rate, also referred to as your utilization ratio, revolving utilization, or your debt-to-credit ratio, measures how much debt you owe on your revolving accounts compared to the amount of revolving credit you have available.
A lower overall utilization rate will result in a better credit score, meaning that lenders will be looking to see how you manage your balances relative to your credit limits. Using too much of your available credit shows that you are a greater credit risk and lenders will be less likely to be willing to work with you.
Furthermore, having too many accounts with balances can also hurt your credit score.
Length of Credit History
Lenders want to know that you are someone they can count on to repay their funds consistently over time. To that end, they’ll be looking to see how long you’ve been able to manage your credit accounts responsibly.
Your actual age is not considered in this, but older consumers do tend to have longer credit histories simply because they have had more time in their adult life to accumulate credit accounts and make on-time payments. In order to improve this factor, all consumers can do is open accounts early on and wait for their accounts to age while diligently making payments and managing their balances.
This factor accounts for 15% of your credit score, but in reality, it is far more important than it seems on the surface because more credit age also means more on-time payments in your payment history, which adds another 35% of your score.
Credit Mix
Your mix of credit is determined by the types of accounts you have open. In general, lenders want to see examples of both revolving lines of credit (e.g. credit cards) and installment loans (student loans, auto loans, personal loans, mortgages, etc.) on your credit report.
This factor accounts for 10% of your credit score.
Learn more about account types and account diversity in our credit mix infographic.
New Credit
Last but not least, credit inquiries account for the final 10% of your credit profile. Hard inquiries appear on your credit report when lenders check your credit when you are looking to open a new credit account with them.
Creditors don’t want to see very many of these hard credit inquiries acquired within the past year. Having too many credit inquiries could be a red flag because it shows that you are seeking a lot of new credit and may not be in the best financial position to pay your bills.
Keep in mind that soft inquiries, which occur when you check your own credit report and other situations when your credit is pulled for something other than a lending decision, are not seen by lenders and are not considered in credit scores.
7 Epic Credit-Building Master Moves
Now it’s time to tackle your credit-building goals. Here are seven strategies to help you take your credit to the next level in no time.
Become an Authorized User
A trusted friend or family member may be able to add you to their credit account as an authorized user. As an authorized user, your credit report will reflect the credit limit and reliable payment history of the account.
If you don’t have someone you can ask to become an authorized user, other options are available. You can purchase accounts with high limits and perfect payment histories from Tradeline Supply Company, LLC.
Open a Joint Line of Credit
Opening a joint line of credit can be a helpful step in your credit-building journey. If you have someone to manage your finances with, a joint line of credit can provide an opportunity for you to build credit along with the joint account holder.
However, there are some downsides to joint lines of credit. They are not available with all lenders, and if you do choose to open a joint account with someone, you may not be able to remove the joint account holder if the relationship sours.
Consider a Secured Credit Card
A secured credit card requires an upfront cash deposit to mitigate financial risk to the lender in case you do not pay your bill. In most cases, the deposit is equal to your credit limit. So, if you deposit $1500, your spending limit will likely be $1500.
Since secured credit cards typically have low credit limits, you will want to keep your balances low so that your credit report does not show a high utilization rate.
If you are just getting started with credit, a secured credit card can be a good way to get the ball rolling.
Set Up Automatic Bill Payments
If you open any lines of credit, it is critical that you make on-time payments in order to build up a positive credit history. A good way to ensure that you always make on-time payments is to set up automatic bill payments. With an automatic payment system in place, you won’t have to worry about missing a payment and hurting your credit score.
But even with automatic payments, it is a good idea to check out your bills each month to keep an eye on your spending as well as any potentially fraudulent charges.
Increase Your Credit Limit
If you already have existing credit cards, then consider asking your credit card provider for an increased credit limit. You will effectively lower your credit utilization rate with an increased credit limit. With a lower credit utilization rate, you might see an increase in your credit score.
Pay Off Existing Debt
On the flip side, you can also lower your credit utilization rate by paying off any existing debt you currently have. Although paying off debt is never easy, it could provide the credit score increase you’ve been looking for.
Want tips on paying off debt? See our article on the debt snowball method vs. the debt avalanche method.
Get Credit For Your Bills
Did you know that you can get credit for some of the bills you already pay? There are alternative credit data services out there designed to add your utility, rent, and subscription payments to your credit report.
For example, Experian Boost, eCredable Lift, and RentReporters can help you get credit for the bills you already pay on time. If you pay your bills on time, having that information on your credit report could boost your credit score.
Fighting Credit Misinformation
According to Possible, 4 in 7 Americans are financially illiterate, so it should come as no surprise that many Americans are mystified by their credit score. Not only that, but many believe in detrimental credit myths, leading to poor credit choices due to misinformation.
If you are working with someone to build their credit, you may have to work through some deeply embedded credit score myths. For example, you might hear that checking your credit score lowers your credit score. But that is completely inaccurate. Other common myths include the belief that carrying a balance will boost your credit score or the idea that your credit score doesn’t matter to your personal finances.
As you dive into the process of building credit, utilize reliable resources to learn more about good credit practices and take action to help you reach the credit score of your dreams.
