Understanding credit scores and what influences them can give you the tools to improve your credit eligibility. Get started by learning some common misunderstandings about credit scores.
A poor credit score will stay with me forever.
Your credit score is simply a number that provides an indication of the level of risk associated with your ability to repay. It is made up of five weighted components: payment history (35%), amounts owed (30%), length of credit history (15%), how many types of credit in use (10%), and account inquiries (10%).
Lenders use your credit score to evaluate your credit risk – generally, the higher your credit score, the lower your risk to the lender. If you have a poor score, you won’t see a change overnight. However, if you consistently take steps to improve your credit score, you’ll begin to see a gradual increase over time. Ways to improve your credit score include paying your bills consistently on time, reviewing your credit report and correcting any errors, and keeping the amount you owe a small percentage of your available credit. If your credit score qualifies you for a credit card, using the card to pay for purchases, paying it off each month, and paying down any remaining credit card or debt balances can also improve your credit score. If you learn you do not yet qualify for a credit card, a card like Wells Fargo’s Secured Card – which requires a deposit to fund your card – could be a good option. Using the card responsibly and making on-time payments totaling at least the monthly minimum may help you improve your credit score over time.
My credit score will be lowered if I check my credit report or apply for new credit.
Your credit score remains the same if you request your own credit report. This is called a “soft inquiry,” and is only visible to you. You can access your credit report any time for a small fee, and you have the right to a free credit report once a year to make sure information is accurate and reflects your credit activity.
Also, applying for new credit doesn’t mean your credit score will drop. However, if several lenders check your credit within a short period of time, your credit score may drop. If you’re looking for new credit, limit the number of credit applications you submit to as few as possible.
Lowering my credit limit won’t hurt my credit score.
This one is not a misconception. Decreasing your credit limit on one or more credit cards can hurt your credit score. The lower your credit limit, the larger your percentage of debt appears. This gives lenders the impression that you’re spending more money than you bring in and, therefore, are a higher credit risk.
Knowing what factors impact your credit score will help you continually better manage your credit and improve your credit standing.