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The first step to solving a problem is to understand it. At Sherpa, we specialize in understanding credit.

To understand your credit you need your credit report and your credit score. These resources will tell where you stand and where many of your problems lie.  Some common issues are:

-Too much debt

-Too many unpaid bills

-A major financial upset such as a bankruptcy

-Not had credit long enough to establish good credit

-Defaulted on a loan, failed to pay taxes, or were recently reported to a collection agency

The  problems that contribute to your credit should dictate how you decide to boost your credit score. When developing your action plan, it is important to know where most of your credit score is coming from.

 

fico score infographic

1) Your payment history accounts for more than a third of your credit score in some cases.  Whether or not you have been a good credit risk in the past is considered the best indicator of how you will react to debt in the future.  For this reason, late payment, loan defaults, unpaid taxes, bankruptcies, and other unmet debt responsibilities will count against you.  You can’t do much about your financial past now but, starting to pay your bills on time – beginning today – can help boost your credit score in the future.

2) Your amount owed accounts for approximately a third of your credit score in some cases.  If you have lots of debt, it may indicate that you are stretching yourself financially thin and will have trouble paying back debts in the future. You can boost your credit score by paying down your debts.

3) Length of credit history can account for up to 15% of your credit score in some cases.  If you have not had credit accounts for very long, you may not have enough of a history to let lenders know whether you make a good credit risk.  You can counter this by keeping your accounts open rather than closing them off as you pay them off.

4) Credit mix accounts for about one tenth of your credit score.  Lenders like to see a mix of financial responsibilities that you handle well.  Having bills that you pay as well as one or two types of loans can actually improve your credit score.  Having at least one credit card that you manage well can also help your credit score.

5) New credit, or rather how many accounts you have attempted to open, represents the last 10% of your credit score.  You may hear this category referred to as “hard inquiries” which is what happens every time that you request a new loan, credit card, or sometimes even a credit line increase. Even though it only represents 10% of your score, it can become a hard stop.   Some banks will not approve you for a new credit card if you have 5 or more hard inquires in the last 24 months.

Understanding these five factors, will help you estimate how much a specific area of your credit report affects your credit score. This understanding can then be leveraged to effectively boost your credit.

Due to the way credit scores are calculated, some actions you take will affect your credit score better than others.  In general, paying your bills on time and meeting your financial responsibilities will boost your score the most.  Owing a reasonable amount of money and being able to repay it will show lenders that you take your finances seriously and pose little threat of lost money.

This can be a lot to navigate but at Sherpa Credit we are dedicated to not only improving your credit but also helping you understand the process and what steps you can take to maintain a healthy score. Contact us today and let us be your guides.