LinkedIn? Facebook? It’s Your Credit Profile That Counts

From online dating to professional networking sites, most of us are accustomed by now to creating personal profiles and curating positive images of ourselves for public consumption. But one snapshot of who you are is less visible, harder to control, and, arguably, more consequential. I’m talking about your credit profile.

Have you taken a look in the credit mirror lately—or ever? Do you perhaps have an inkling of how “attractive” you are based on your experience of being offered or turned down for a credit card or loan? You’d be surprised how many people don’t really know what they look like from a credit perspective or why their credit scores matter. So let’s dive into how credit reporting bureaus develop the portrait-in-numbers that bankers, landlords, and even employers see when they access your credit report. We’ll also talk about steps you can take to touch up your credit image or, if necessary, take on a full credit makeover.

Who’s Judging This Beauty Contest?

Who are these powerful portrait painters anyway? There are about 400 credit reporting agencies out there. The big four are Experian, Equifax, Transunion, and FICO. The smaller reporting companies tend to specialize in mining more obscure data. Lending institutions may rely on them to gather information from public records, professional associations, and other sources, depending on the type of loan or credit you are looking for. But most lenders focus on reports from the big four. You can—and should—download free copies of your credit reports from Experian, Equifax, and Transunion once a year. You may find that your bank or other financial institution you do business with provides your FICO score as part of the services they provide.

Your score may vary from bureau to bureau because each company may weigh your credit qualifications somewhat differently. But they all pretty much look at the same factors when assigning you a score.

What Makes You Look Creditworthy?

Credit bureaus don’t know you personally. They’ve no way of knowing that you’ve never bounced a check or had your gas shut off,  or that you paid off a loan from your uncle ahead of schedule. So they look at factors that are easy to document. These are the same factors you should be aware of when trying to build a positive credit profile.

• How Long Have You Been Using Credit?

First, credit bureaus look at the length of your credit history. Even if you’re extremely conscientious about your finances, if you’ve never had a mortgage, a car loan, or a store charge, credit bureaus have no way of judging how likely you are to pay off your debts. That’s one aspect of credit that’s tough to get your mind around. You can have a high income and zero debt and still not be viewed as creditworthy by a credit bureau. That’s why it’s important to establish a credit history before you ever need a loan. Start small. Apply for a store charge card, charge a purchase to your account, and pay your balance promptly. Do that a dozen times and you’ll be on your way to a great credit report. According to one of the largest credit repair companies in the US, Lexington Law, your credit history accounts for about 15% of your credit score. Lenders consider you truly established when you have a credit history of seven years or more. So keep at it. Use credit regularly—and of course, judiciously—to build a more positive credit profile.

• Do You Pay Your Bills on Time?

Creditors and credit bureaus like to see you keep your promises. That means keeping to the repayment schedule you agreed to when you make a credit purchase. Your on-time payment history is the most influential factor credit bureaus consider when assigning you a score. By some estimates, it accounts for 35% of your credit score. So even if you can only afford to make the minimum monthly payment due on a credit account, do it. On-time and every time. According to FICO, a single recent late payment could cause your credit score to drop by up to 180 points.

• Are You Living Within Your Means?

One measure that credit bureaus use to decide how creditworthy you are is the amount of debt you’re currently carrying. Before advancing you more credit, creditors want to know that you can manage the debt you already have. Your total debt accounts for about 30% of your credit score. Some creditors will also look at your debt-to-income ratio when deciding whether and how much credit to give you.

• Mix it Up

There are plenty of ways to borrow money, from student loans to individual retail charge cards. People who have successfully managed various types of credit are considered the most creditworthy by credit reporting agencies. Credit mix accounts for about 10% of your credit score.

• Don’t Borrow Too Much Too Quickly

Again, when you’re trying to establish good credit, it’s important to start slowly. Opening too many accounts at once can be detrimental to your credit score. Credit bureaus tend to be suspicious of people who open too many accounts too quickly. In the credit world, that can signal you may be in financial trouble and are using loaned money to live on. New credit detracts from your credit profile and accounts for about 10% of your credit score. In general, it’s not a good idea to have too many open accounts. So if you’re not using one of yours, it’s best to close it.

Why You Need Good Credit

Many creditors require a minimum credit score for credit applicants. For example, if you’re applying for a mortgage, mortgage lenders may demand a score of 680 or higher from their borrowers. VA loans and similar government-backed mortgages typically have more lenient requirements, but not everyone is eligible to apply for one. Having a higher credit score increases the number of options available to you. More importantly, you will be offered loans with lower interest rates if you have a high credit score. People with high credit scores not only have greater access to credit but can live more inexpensively while carrying debt.

How to Boost a Low Credit Score

If your credit score is lower than you want it to be, there are a number of steps you can take to improve it. Bringing any delinquent accounts up to date is the fastest route to credit score gains, even if you can only make the minimum payment due.

Pay off as many balances as you can. Creditors look at your credit utilization percentage—the amount of credit you’re using compared to how much lenders are willing to give you. Lenders consider 30% adequate, but if you can bring it down to 10% you’ll likely see a substantial boost in your score. You can also improve your score by paying off debts strategically. Credit bureaus look at your accounts individually when it comes to credit utilization. Focus on paying down accounts that offer you the least credit to improve your credit utilization rate on individual accounts.    

Next, thoroughly review your credit report. Sometimes credit bureaus make mistakes, such as inaccurately recording a payment as late or listing accounts you may have closed. Disputing these mistakes can be time-consuming and frustrating as you’ll likely need to contact all three credit bureaus and/or your creditors.

Some people decide to engage a credit repair company to help them with the painstaking and often tedious task of improving their credit scores. Nowadays, these companies rely on artificial intelligence to speed the credit repair process. But do your homework before selecting a firm to help you. Avoid any companies that make unrealistic claims, such as removing a bankruptcy from your report. No credit repair company can remove legitimate negative remarks from your report. The truth is the truth, and sometimes, it hurts. Learn from your mistakes and practice the good credit habits we’ve discussed to have access to credit when you need it and pay less for the privilege of borrowing.