credit scores, the adult version of a GPA. Isn’t it amazing to think how little we learned about this elusive number in school? As someone who had to take an economics course at university, I can assure you that questions of personal finance just weren’t covered. And with so many credit score horror stories at a quick Google search, it’s hard to know what’s actually affecting your score compared to good ol’ internet lore.
Luckily, we have a savvy speed dial expert who can explain common credit score myths to avoid, as well as how to aim for that coveted “perfect” credit score. Keep reading like
Kimberly Palmer a personal finance expert at NerdWallet, answers common credit score questions and more to help put us all on the path to financial freedom. If you’re unfamiliar with NerdWallet, it’s a personal finance site and app that helps consumers make the best financial decisions, and that includes providing information and ideas on how to build your credit score.
But first, what is a good credit rating?
Before we dive into building your credit score, we want to make sure you have a foundation of information to best assess your current financial situation. As a reminder, your credit score estimates the likelihood of you repaying borrowed money and paying bills, and typically runs on a scale of 300 to 850. Although creditors set their own standards for scores they approve , here are the general ranges:
Now let’s get to expert advice and myth busting.
Myth #1: If you have bad credit now, you’re stuck with that score forever
“You’re definitely not stuck with bad credit forever,” says Palmer. “You can increase your credit score over time by making on-time payments each month, using 30% or less of your credit limits, and keeping old accounts in good standing so you have a longer history to view. on your credit report.”
Myth #2: Checking your credit score actually hurts your reputation
“When you check your own
credit score, it doesn’t hurt, but your score may be temporarily affected if you apply for a new credit account, whether it’s a mortgage, car loan, credit card or any other type of loan,” says Palmer. this triggers what is known as a “strong pull” on your credit, which can signal to lenders that you are considering taking out a loan. When a lender checks your credit score as part of your credit application process, it is considered a difficult effort.”
Myth #3: Having a balance on your credit cards improves your score
“carry a balance doesn’t help your score,” says Palmer. “And actually, you want to be sure to keep your total balance below 30% of your credit limit to prevent your balance from hurting your score. This myth probably leads some people to keep a balance on their cards when they better pay it off. Carrying a balance on your card is also expensive because you pay interest. »
Myth #4: Achieving a perfect credit score is impossible
perfect credit score is possible, but anything over 720 is considered excellent credit. Less than 1% of consumers have a perfect score.”
Myth #5: Closing a credit card will improve your credit score
“Closing a credit card can actually hurt your credit score because it can reduce your credit history and it also eliminates the available credit limit on that card,” Palmer shares. The same can be said for loans. “Another myth is that paying off a loan will improve your credit score; sometimes when you pay off a car loan or mortgage it can hurt your score because then you have one less active line of credit.”
Myth #6: If my partner has bad credit, my credit score will drop
Palmer says, “Each person has their own credit score; it’s not shared or directly affected by a partner. But a partner’s behavior can harm your credit score; for example, if you share a credit card credit and the partner overspends or the account is overdue. If both of your names are on the account, it can impact both of your credit scores.”
How to build your credit score
Now that we’ve cleared up all the myths, what are the next steps for building your credit score today? To start, you can easily
check your credit score and credit report with NerdWallet to understand where you currently stand.
To raise your credit score, Palmer says you need to make on-time payments on all of your accounts each month; second, use less than 30% of the limit on any credit card, making it easier to use your credit; and finally, keep your old accounts open and in good standing to give yourself a longer credit history. As for when to expect to see the results of your hard work, Palmer says, “You may see your credit begin to improve within a month or two of making on-time payments to your accounts. You may also see almost immediate progress if you have a relatively thin credit history and are added to someone else’s credit card account as an authorized user or successfully dispute an error in your credit history which was hindering your score.
As a final piece of advice, if there’s one thing everyone reading this should be doing today to start seeing positive progress, Palmer suggests “setting up automatic payments for at least the minimum credit card amount due on your accounts to reduce the risk of accidentally missing a payment and being hit with a late payment penalty.You just want to make sure you have enough money in your bank account to make these payments before you automate them.
For detailed information and additional resources on what credit score you need to buy a housefor take a loanor more generally to understand what is considered a good credit rating, check out NerdWallet’s in-depth research. With these helpful tips, good credit is finally within reach.