Your credit score may look like a mysterious number that materialized out of thin air.
But what is it? What does it mean for your overall financial health? And how does it affect your ability to pursue student loan refinancing?
To sum it up, a credit score is essentially a prediction of how likely someone is to pay back a loan on time. That number can have a significant effect on your financial future — from getting approved for loans (like a student loan refinance) to qualifying for substantially lower interest rates.
So how does your score get calculated? What can make it go up or down? And perhaps most importantly, how do you improve it for the long term?
Your credit score might seem like a difficult and mystifying case to solve, but you don’t need to be a detective to crack the code. First, you’ll need to understand the factors that can alter your credit score. Then, you can determine how to address each factor to get the best credit possible for your own financial situation.
Whether you’re looking to establish good first-time credit, change your score for the better, or just maintain your current number, there are specific steps you can take to positively influence your credit. And once you’ve got a strong credit score, the world of better interest can open up to you — including lower refinancing rates to save you significant cash on your student loan debt.
Here are 5 common factors that can impact your credit score and what you can do to increase it — simply and effectively.
1. Payment History
What Is It?
How timely you pay your bills is typically a crucial credit scoring factor. One of the most important elements of your payment history is having a proven track record of on-time payments over a long period of time, which proves to lenders (and your credit score formula) that you can be trusted to repay debts.
On the other hand, serious payment issues, such as charge-offs, collections, bankruptcy, repossession, tax liens, or foreclose can negatively impact this aspect of your credit score.
What Can You Do?
This advice sounds simple but can be difficult: pay your bills when they’re due and don’t miss payments. Easier said than done, right?
It’s important to understand your bills each month, anticipate the amount you’ll need, and ensure you have the available funds to take care of your payments. Try setting up autopay or phone alerts to remind you of due dates.
By showing that you can pay your debts consistently, you could see a significant increase in your credit score.
2. Credit Usage
What Is It?
Part of this equation is the amount you currently owe on installment loans like personal, student, or auto loans. But the more influential component is your credit utilization rate, or the ratio between the total balance you owe and total available credit across your accounts.
A lower utilization rate will usually help your credit score, and the combined rate of all your accounts is often more important than any single rate on a specific account.
However, keep in mind that your individual accounts can still play a role, as having multiple accounts with balances can be a risky sign to lenders.
In fact, a common guideline is that you should keep your credit utilization (both as a whole and on each individual card) below 30%. This number isn’t exact, but most experts agree that it is a good guideline to keep your credit score from dropping substantially.
What Can You Do?
If possible, you shouldn’t max out your cards, so that you always maintain available credit. Making payments more often and in larger chunks can also help by bringing down your total amount owed more quickly.
But remember: pay attention to your available credit as a whole — even your cards with lower limits — because they all contribute to your overall utilization rate.
3. Length of Credit History
What Is It?
This is simply the length of time you’ve been using credit. However, your credit score looks at a few different aspects including the number of years you’ve had credit commitments, the date you opened your first account, and the average age of all your accounts.
Although a longer credit history can be useful, a shorter history shouldn’t lower your score too much if you’re making on-time payments and keeping your debt low.
What Can You Do?
If you haven’t done so already, opening your first credit card is a fundamental step in establishing strong credit. If you’ve already been using credit, it’s often recommended to avoid closing your cards to keep the average age of your accounts from being negatively affected.
4. Types of Credit
What Is It?
Credit score formulas will typically consider your total number of accounts as well as your overall mix of credit types including credit cards, student loans, auto loans, mortgages, store accounts, and more.
What Can You Do?
This is usually a small part of your score, so it shouldn’t be a big concern if you don’t have open accounts in each category. In most cases, you shouldn’t open new accounts just for the sake of increasing your mix of credit types.
5. Recent Credit Inquiries
What Is It?
After applying for something that requires a credit check, an inquiry will appear on your credit report. There are two types of inquiries:
- Soft inquiries include things like checking your credit score or getting an interest rate quote, which don’t hurt your total score.
- Hard inquiries occur when a creditor checks your credit before making a lending decision, like when you apply for a new card or loan, which can decrease your score if done too frequently.
The good news? Only inquiries within the last 12 months affect your credit score, and they disappear completely from your credit report after 24 months.
What Can You Do?
Don’t be afraid to check and compare loan options. Credit scoring formulas know that today’s consumers like to shop around for the best rates and compare their choices.
However, it’s recommended to apply for and open new credit accounts only when needed so that you can minimize hard inquiries and keep your credit score where it should be.
Happy with your credit score?
If you have student loan debt and strong credit history, you could qualify for a much lower interest rate through student loan refinancing.
Quickly and easily compare your rate options from the best lenders – with just one simple form and no credit check required.
