Keep Your Credit Score High: Create Fewer Hard Inquiries

When talking about financial literacy, credit scores come up often. Credit scores are made up of complex algorithms that take many behavioral aspects into account. It might seem complicated, but there are only five main parts of a credit score:

– Payment history
– Debt ratio
– Types of credit used
– Length of credit history
– Inquiries

Today, we’re going to talk about inquiries. There are two common types of inquiries on your credit score: “hard” inquiries and “soft” inquiries.

Hard inquiries are when you allow a institution to check your credit score or “run your credit” in order to decide if they will extend you credit. When you allow an organization to make a hard inquiry on your credit report there will be a notation made on your credit report that will stay for two years. The fewer the hard inquiries on your credit report, the higher your credit score will be. Only let organizations that you really want credit from to check your credit score.

Soft inquiries are when you pull your own credit report and/or scores. There is no downside to taking a look at your own credit score. Now, you can pull your credit reports, not scores, for free. Knowing what’s going on will often empower you to make changes or give yourself a pat on the back. Many times credit scores are higher than you thought.

Keep in mind that there are three major credit reporting bureaus in the US. To get an accurate picture of your financial health you’ll need to pull reports and scores from all three bureaus for $40.

Read more about credit scores and reports in Money Matters: The Get It Done in 1 Minute Workbook and 10 Things College Students Need to Know About Money. Check them out.

5 Steps to Raising Your Credit Score

There are 3 credit reporting agencies Experian, TransUnion, and Equifax and each of them has a credit file on you. These agencies pay very smart people to create complex algorithms to help lenders decide whether to extend you credit or not. These algorithms do NOT take into account your:
– Age
– Gender
– Income

There are 5 things that are weighted very heavily that go into determining your credit scores and they are completely under your control:

Bill payment history – Lenders are able to look at your credit report and see what accounts you have, debt amounts, and how often you have been 30 days, 60 days, and more than 90 days late. They can also see when your debts have been written off or transferred to a collection agency. If your bills aren’t paid on time it’s your fault and those notations will be taken into account.

Debt ratio – how much credit you are able to access divided by how much credit you have used. Lenders would like to see under 30% utilization.

Length of credit – The longer you have used credit, the more accurate the scores will be. Be strategic when choosing credit cards, store cards, loans, etc. Opening and closing accounts both take a toll on your score.

Types of credit – Lenders would like to see a good mix of types of credit. The two main types of credit are installment accounts and revolving accounts. Installment accounts are loans that the payment will be the same every month because both you and the lender have agreed on the terms of the loan. Examples of installment loans are mortgages and car loans. Revolving accounts are loans that vary from month to month depending your usage. Examples of revolving accounts are credit cards and store cards.

Hard inquiries – Every time you apply for credit cards, store cards, cell phones, etc. a “hard” inquiry is noted on your credit reports. Get enough hard inquiries and it will lower your score. You can look at your credit report, a “soft” inquiry, all day long and it won’t change your credit report scores.

Manage these 5 areas and your credit score will improve which will save you money on everything from loan interest rates to deposits for your utilities. To read more about how you can better manage your credit score buy Money Matters: The Get It Done in 1 Minute Workbook.