A reader recently wrote in and asked a question about how credit scores work.
Credit can be extremely complicated, so I figured I’d share my answer with everyone.
Here’s the question:
I really feel like my credit score jumped up a lot when I got a rental payment in my name.
When I first got out of college I sub-rented a room in a townhouse with roommates so nothing was in my name.
I had credit cards and used them properly and paid every bill on time and still my credit was “average.”
It jumped up about a hundred points just a few short months after I had moved into an apartment in my name with water and electric bills all paid on time.
Is this a coincidence or are rental payments and utilities things that make a bigger impact on your score than what credit card companies would like to let on?
Also, what advice would you give to a friend who wanted to repair or build credit quickly?
Having credit cards is a great way to build credit. You don’t have to carry a balance to grow your score, simply use them and pay them off in full every month.
Your credit score should increase as your credit accounts get older in age, the debt you have relative to your credit limits shrinks and as you grow the different types of loans you have on your credit report, such as credit cards, car loans, student loan debt and mortgages.
Did Rent Or Utilities Raise My Credit Score?
Based on the information provided above, it sounds like your credit score increased because either an old bad mark, such as a late payment, fell off of your report or something else changed.
I’d say it is very unlikely the rent or utility bills being in your name had anything to do with the score increase.
Sadly, things like rental and utilities rarely, if ever, get reported to credit bureaus who write your credit reports which the credit scores are based off of.
That means there is a very small chance that having rentals or utilities in your name had anything to do with your credit score increase.
On the other side of the coin, if you have a rental or utility payment in your name and you miss a payment, you may end up with a negative mark on your credit report.
The landlord or utility company would have to report the late payment to a credit bureau which is more likely for late payments.
One way to avoid late payments is by using budget billing. It averages out your bill so you aren’t hit with big bills during peak seasons.
If you want to repair credit or build it quickly, I’d check your credit reports to make sure there is nothing wrong on them. You can get 1 free copy of your credit report from each of the 3 bureaus once a year at annualcreditreport.com.
This is the official site required by the government to give out free credit reports once a year. This will not include your score, just the information used to calculate your score.
How Your Credit Score Is Calculated
For a bit more information on credit scores, here is an article I wrote about how your credit score is calculated. Below is a quick summary.
Basically, the biggest part (35%) is payment history. You can’t change the past if you missed a payment, but make sure you make all your payments on time going forward to keep this as high as possible.
If there is a wrong late payment on your report, dispute it and get it removed for a big boost in your score.
Next biggest category is amounts owed at 30%. The best way to grow your score here is pay off your debt! Big things like car loans, student loans and mortgages won’t be paid off quickly, but the smaller the balances on each individual debt the better.
The biggest win is if you have some low limit credit cards that have balances over 30% of your credit limit. Pay those down to at least 30% or lower, preferably 10% or lower. That should help out your score.
There isn’t much you can do to change length of credit history (15%) or your types of credit (10%) without some semi-shady tactics so it probably isn’t worth your time.
The last 10% is your recent inquiries. Each time you apply for credit, a lender issues an inquiry. Don’t ask for credit and you will have 0 inquiries and this part will be as high as possible.
That about wraps up the answer to this question. If you have a question you’d like me to answer, simply leave a comment below or write an email to Lance (at symbol) MoneyManifesto (dot) com.