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Published May 2, 2017

University of Louisiana Monroe Professor of Economics Tammy Johnston, Ph.D., has shared her expertise on credit scores in an article written for wallethub.com. Here are Johnston’s comments in Ask the Experts.

 

Ask The Experts

Improving one’s credit score is a different process for everyone, depending on one’s circumstances and spending habits. For advice on doing so and insight into faulty consumer thinking, wallethub.com asked a panel of experts to share their thoughts.

 

What tips do you have for a person trying to increase their credit score in a short amount of time? 

  

 

First, check your credit report. From the credit report, you can ascertain what might be causing the issue. For many people, it is a habit of paying late. Payment history typically makes up about 35% of the calculation of the credit score. 

If you see an error, you can begin a process of disputing the error. However, realize that disputing an error is not going to be a quick process. 

To obtain and maintain a higher credit score, you need to:

• Pay on time. This means really on time. Not a day late. Some people have the attitude that as long as they don't receive a late notice in the mail -- they are ok. This is not accurate. The late mark shows on your credit report every month that you pay late. Pay early and you'll have no worries. 

• Don't overuse your credit. Part of your credit score is your utilization of available credit, around 10% utilization is optimal. That is, if your credit card has a $5,000 credit limit you should never charge more than $500 during a billing month. And you should pay off the full amount by the due date.

• Have an installment loan (such as car loan or mortgage) that you pay consistently on time. You don't need to have an installment loan always. If you pay off your car or house that is fantastic -- don't rush to buy something new or bigger just to get another loan. But, over time, have an installment loan history.

• Don't open new credit accounts. Opening a new account will temporarily bring your score down (approximately, for 3-6 months and it can drop your score by 15-30 points easily).

• Consider the types of credit you have: long term versus short term; revolving accounts such as credit cards versus installment accounts such as car loans and student loans. Ideally, you want a variety in your credit history.

 

What are some commonly held misperceptions about how credit scores are calculated? 

Having a high income does not affect your credit score directly. Someone with a high income that over uses credit and pays late will have a low credit score. So, being rich doesn't decide your credit rating. Your credit rating comes from how you manage what you have. 

Which is the best way for a young person to build credit? 

Get a credit card (a secured card if necessary) to start building a credit history. Use the credit card to buy gas / small purchases each month and pay off the entire amount each month. Also, keep the amount to 10% of the credit limit. So, if the credit limit is $1,000, only charge / pay off $100 each month. Do not run a balance. Do not overuse the credit card. Do not pay late.