Close to a third of Americans officially have bad credit. This is defined as a credit score that’s lower than 601.
Credit can be complicated. Many people believe that credit monitoring will hurt their credit score, and have no idea what their credit score actually is.
Read on to learn some of the most common misbeliefs around credit, and whether you should be monitoring your score.
How Does Credit Work?
When you apply for credit, lenders need to determine whether they can trust you to pay it back. Your credit score is a three-digit number that helps lenders make this decision. People with good credit scores are eligible for better interest rates and credit cards with better rewards.
Your financial habits impact this score. It goes up when you’re responsible with your credit, and it goes down when you’re not. Here are the components that make up your credit score:
This is the largest component of your score. That’s why it’s so important to make sure you make your payments. If lenders can see that you have a negative payment history, they’ll assume you can’t meet your current obligations.
It’s easy to forget to make a payment on time- after all, life is busy. But if you’re late for a payment on a loan or credit card, your credit score will usually have a negative adjustment.
How much will this adjustment be? This often depends on just how late you are. Do yourself a favor and set up an automatic payment so you don’t need to remember to pay each month.
Debt Burden and Utilization
Lenders want to know how much debt you have, and the percentage of credit being utilized. This last factor is super important- you want to show that lenders trust you with credit, but you don’t really need it.
Generally, your utilization should be less than 30%. That’s why you should be careful when canceling credit cards. This can decrease the amount of credit available to you, increasing your utilization- even if you haven’t actually used more credit.
Length of Credit
The older your accounts, the better. If you’re considering canceling a card, try to avoid canceling your older credit cards so you can show a longer credit history.
This is a credit adjustment based on any hard inquiries into your credit history. And this is why many people believe that credit monitoring will hurt their score.
Your credit score does adjust based on the number of inquiries, and will usually be adjusted within around 30 days so you have time to shop around. When you apply for credit, the lender will pull your credit history- and that impacts your rating.
Is Credit Monitoring Bad?
As mentioned above, your credit score is impacted when lenders check your credit history. This is what’s known as a hard inquiry or sometimes a ‘hard pull.’ And it costs you points.
This is because this type of inquiry is when someone is deciding whether they should extend credit to you. You can expect this inquiry to cost you anywhere from five to twenty points.
A soft inquiry (also known as a ‘soft pull’) is when you check your own score. However, this can also be performed by a creditor who’s considering preapproving you for a credit card or loan.
If you’re applying for several credit cards within a short time frame, you could see your credit score drop significantly. A hard inquiry will stay on your report for two years.
Here’s why you should monitor your score:
Check for Discrepancies
Monitoring your credit is the same as a soft inquiry, so it won’t impact your score. It’s actually a good idea to regularly monitor your score since you’ll easily be able to see if something is wrong.
If you see a massive change in your score, it could indicate that you’ve been a victim of identity theft or there has been a mistake in your report.
Predict Your Approvals
Before you apply for a credit card or loan, it’s a good idea to know if you have a high chance of approval. That way, you won’t waste time (or the hit to your score) on a hard inquiry for a product you don’t qualify for.
These days, it’s easier than ever to monitor your credit score. The three major credit reporting bureaus are TransUnion, Experian, and Equifax. By law, they’re all required to give you one free copy of your credit report each year.
There are also a number of services and apps which will give you updates each month, so you can see how your activities are impacting your score.
Need to Increase Your Score?
Have you recently checked your score? Maybe you’ve found that it’s lower than you thought it would be? Or maybe you were turned down for a credit card or loan?
Here are the best ways to increase your score:
Know Your Starting Point
Knowledge is power. That’s why it’s a good idea to make a list of everything you owe, and when your payments are due. Check your credit report to make sure everything lines up, and then you can create a strategy to increase your score.
Decrease Your Utilization
You can do this in two ways: First, apply for a credit limit increase. If you have a good payment history, you’re likely to be approved. The second option is to pay off as much as you can to get that utilization under 30%.
Create Good Habits
Maybe you need to set up a direct debit or automatic payment. Or perhaps you need to mark your payment due dates on your calendar. Make sure you’re always paying on time, and your credit score will begin to increase.
As you can see, credit monitoring is a smart way to take control of your finances. By regularly monitoring your credit, and using the above tips, you’ll be able to watch your credit score increase in 2019.
For more information about improving your financial health, check out some of our blog posts.