Ok, we are really cruising here. You should have already read “MAKING YOUR CREDIT SCORES MAGNIFICENT” – Part 1 and Part 2.

In those you learned how much money you can save by focusing on your credit, ways to improve your credit scores with credit mix and credit length, and even more information. Now we are going to jump in to the final credit score informational pieces to help you knock out the rest of your credit score to boost it to magnificentcy (not a word, but I feel you can still sound smart saying it as long as you don’t have many friends who are walking dictionaries).

The final three pieces are around focusing on your credit scores with:

1. Credit Inquiries (pulls/checks)
2. Revolving Utilization
3. And Credit history

Let’s first jump into CREDIT INQUIRIES – This is another smaller aspect of your credit scores and accounts for around 10% of your credit scoring.

When you are shopping for credit/financing (whether via a credit card, car loan, mortgage, or whatever) the lender getting you the credit approval and quote will need to do a “hard credit pull” in order to acquire the fullest extent of your credit information. A hard credit pull, for simplistic purposes, just means they are actually pulling your credit (which will report to the credit bureaus) in comparison to a soft credit pull, which is what you have done when you look at your credit scores via Credit Karma, a credit card website that shows you your scores (sort of), or other locations that give you an approximate credit score whenever you wish to look. A hard credit pull is the only truly accurate credit pull, as it is the official credit report that is pulled (where as soft credit pulls do not pull your full credit report and information).

You can often see that the soft credit pull is not very accurate and people often complain that their phone apps, credit card sites, etc. traditionally show scores that can be very different than what the actual credit bureaus report. This should not deter you from looking at the soft credit pull information from these different sources, as you need to watch your credit information to make sure someone didn’t steal your information and open accounts you did not approve, or to make sure that something was not reported in error. Monitoring your credit activity is very important and can be done with soft credit checks without harming your credit scores. But, you need to keep in mind that your credit scores may show very differently when you actually have your credit pulled via a lender.

Regardless, when it comes to you wanting to acquire credit, a lender will very likely be required to do a hard credit pull to access your most accurate credit information. These credit inquires are, therefore, signs of credit seeking activity that are notated by the credit bureaus. If you have a high number of credit seeking activities (inquiries) in a short amount of time (say the last 120 days), the credit bureaus will likely decrease your credit scores because that many credit inquires in a short amount of time could be a sign that financial issues may have occurred, which is a sign of risk for the lenders. You, therefore, want to keep the number of hard credit pulls done by lenders to a minimum, which simply means, do not try to take out a bunch of debt.

Two notations quickly on these credit inquires:

1. Just because you have your credit pulled a time or two does not mean you will have your credit scores drop. The credit bureaus understand that shopping around when getting a loan is a smart financial decision, so if you have two or three credit inquiries in a short period, this will not likely affect your credit scores very much. It is highly encouraged that you have a couple credit pulls done because you have looked at a couple lenders to make sure you are getting the best interest rates, terms, and fees for the loan you are looking to take out. If you have your credit pulled 8 times in a 3 month period though, you need to expect your scores are going to drop (possibly substantially). If you have your credit pulled twice in that period, it is unlikely to have an impact (as long as you didn’t have a bunch of credit inquiries a few months prior). Make sure you shop around to get the best deal for yourself. Just make sure you don’t go crazy with how many lenders you look at.
2. When I see that people’s credit scores have decreased substantially due to too many credit inquires in a short amount of time, the majority of the time it is caused by people out car shopping. Car shopping in of itself does not cause issues to credit, but what traditionally happens is that someone sees a vehicle they have been looking for on a car lot and go into the dealership to inquire about the vehicle without already being approved by a lender to buy it. The car dealership offers to help get them approved to buy the vehicle and shops the person’s information with all the banks and lenders that the dealership has partnerships with. Traditionally speaking, this is seven or more lenders, and each of those lenders does a credit pull on the individual looking to buy the car to provide interest rates, approval, terms, etc. The car dealership is just trying to do good business by trying to create business for their partner lenders, and they are also trying to get the prospective car buyer a good deal by checking for best interest rates, and more. The problem is that since they pulled that person’s credit with so many different lenders, it creates an after affect that drops that person’s credit scores massively (often times 30 to 50 points). An easy recommendation to fix this issue is to make sure you get approved to purchase a vehicle from your bank (or a bank) prior to looking at vehicles. That bank only needs to pull your credit once to approve you for a car loan, and your credit does not take that massive hit. If you wish, once you find the vehicle, you can also have another bank quote you what their rates are so you can compare that to your initial bank’s offer. That one extra pull is unlikely to be a problem. But, I would highly recommend not allowing the car dealership to pull your credit at any point to keep your credit inquiries at a minimum and save your credit score. Often the car salesman has no idea that pulling your credit is likely to wreak such havoc on your scores, so do not rely on them to give you advice on whether or not you should have your scores pulled by the dealership. Our answer will always be do not do so.

Therefore, quick recap on Inquiries. Keep the number of credit inquiries that you have in a short amount of time (a year or less) to a minimum. Too many credit pulls in a short timeframe will likely decrease your credit scores, and depending on the number of inquires, can have large negative effects on your credit. If you already had too many inquiries in a short amount of time and your scores have been impacted, make sure you stop having the credit pulls for as long as possible and give it quite a bit of time before you have a new one so your scores can recover.

REVOLVING UTILIZATION – This accounts for around 30% (THIRTY PERCENT!) of your credit scoring.

Revolving Utilization just means the credit bureaus look at what percentage of your revolving credit limits you are using up. For instance, if you have a credit card that has a credit limit of $1000 on it, and you have a balance on that credit card of $700, you are utilizing 70% of your available revolving credit (which is not good).

Utilization is the measure of how much you owe compared to what you can borrower and is one of the major factors affecting your credit scores (as you can see above, it equals 30% of your scoring, so this is a big deal).

Lenders want to see that you are managing your revolving accounts (credit cards, lines of credit, etc.) very well, and a tell-tale sign that you are not is that your balances on those revolving accounts are very high compared to the credit limit that is available. The higher your utilization (80%, 90%, etc. etc.) the more the credit bureaus are going to drop your credit scores because it appears you are overleveraged.

This is both very nice and debilitating. If you are actually overleveraged (you took out more money than you can easily pay back quickly) then your credit scores could be lowered by quite a lot for quite a while until you can manage to figure out a way to improve your situation. Since credit cards also have very high interest rates (at the time of this writing they were up around 29% for an average card), your ability to pay down the credit card quickly in a situation where you have too much debt is also getting dramatically pushed back by the large growth of the balance due to interest accrual costs (owing $10,000 on a balance means the balance is increasing by $241.67 a month in interest costs alone at that 29%).

If you are in a simple position where you have credit limits that add up to $1000 and you owe $700 on the revolving accounts, you can hopefully get that $700 paid off quickly (due to it being a smaller balance) and your credit scores would increase quickly as a result (often by 20 to 50 points depending).

Traditionally speaking, there are some major breakpoints to focus on to improve your credit. First, getting your balances below 50% of the credit limit will improve your credit scores a little. Getting the balances below 30% will increase your scores a good amount more, and getting the balances below 10% of the credit limits will give you the largest boost to your credit scores.

Some quick notes on this aspect of your credit:

1. If you do not have any active/open credit cards or other revolving credit lines, your credit scores are likely taking a large negative hit. This is because you are missing out on 30% of your credit profile since you do not have any active revolving credit activity. If you are 100% against having a revolving account (like a credit card), you need to understand you likely will have lower credit scores, permanently. My recommendation for everyone is to have one open revolving account at all times (preferably that you have had for a long time to improve your credit length), that you use periodically so you have activity and it stays open. But you should not put much of any balance on it and pay off the balance before any interest would be due. This will both increase your credit scores to a higher (or the highest) range, and make sure you are not paying unnecessary interest costs that could go to something much better instead.
2. Another way to improve your credit scores, outside of paying down the balances quickly, is to ask the creditors to increase your credit limit. If you have made your payments on time, the creditor will likely increase your account limit, which can give you more wiggle room to your utilization percentage. This should not be done instead of paying down your balances (always get your balances paid down and off), but it can help make sure you don’t accidently have your utilization go too high and lower your scores. For instance, in the example above, if you had a $1000 credit limit and you $700 on the balance, you utilization percentage is 70% (700/1000). You could ask for a credit limit increase of $1500 and your credit limit would then be $2500. $700 of $2500 is a 28% utilization, which would drop you both below 50% and 30% utilization, and likely improving your scores nicely. Again, that does not mean you do not need to pay off your balance, but it can help make sure your scores stay higher.
3. I’d also recommend never closing a revolving account that has a balance. If you close any account, that account activity will fall off, which can lower your credit scores a little bit. But on top of that, if you close a revolving account and you still have a balance on the account, you will see a bigger negative impact to your scores because your credit limit decreased (the account was closed) but your balance is still there, so your utilization percentage just increased 700% in that last example because of the credit limit going away. Instead, no longer use the card (cut it up or throw it away) but pay it off and then just let the card eventually cancel itself out because of lack of activity on the account. You don’t affect your utilization percentage as much, and you gain a little more credit length on that account before it is closed.

And finally, CREDIT HISTORY – This is the last component and makes up the largest percentage (35% of your credit scoring). When people think of credit scores they usually think of and focus on this component. This is for good reason, as it is obviously the largest percentage of impact to your scores. But notice it is not that much more (percentage wise) than the other components that make up your scoring. All aspects need to be managed well to have your scores at peak ranges.

Regardless, if you want to have even decent credit scores, you 100% have to kick butt at making your payments on time. Every account should be on auto payment, you should be checking to make sure the payments all went through, and nothing here should be left to chance. Even if turns out that the creditor messed up and forgot to take out a payment, even though you had autopayment set up, it can impact your scores negatively for quite a while (as it can be difficult to have creditors remove incorrect credit mistakes).

On top of that, big, derogatory credit items such as bankruptcy, foreclosure, short-sales, collections, judgements, charge-offs, etc. can drop your credit scores 50 to 200 points, and have it take a year or more to recover. These types of credit gut punches can often make it so you cannot look at buying homes, vehicles, certain apartments and other important aspects of your life for some time.

And finally, most lenders also can apply late fees to your accounts if you did not make the payments on time. So, not only can your scores take a hit (or massive hit), you can also have even more of your money taken from you in order to satisfy the late fees that come with your late payments. I’m sure you can guess losing money to fees is not the financial plan that will help you gain wealth and financial freedom.

We do not need to deep dive too harshly into this area of credit, because we all know what needs to be done here. Make sure you make all your payments on time, to infinity and beyond, as Buzz Lightyear says.

If you sadly had some late payments on your credit recently, there really is only three things that will move your scores back into good ranges, semi-quickly:

1. Have every other aspect of your credit (low revolving utilization, few credit inquiries, long history, etc.) be super strong to hold up the rest of your scoring.
2. Catch up those late payments asap and never have a late payment again (if possible try to negotiate with the creditor to have the late payment removed from your credit – though this is unlikely).
3. Give your credit time. The farther away you get from the last late payment (or collection, bankruptcy, etc. etc.), time wise, the better your scores can be. These derogatory credit activities impact your scores immediately, then slowly become less impactful over time as new credit history comes in and takes over the old, bad credit history. So, if your new credit history shows strong, eventually it will improve your scores back up. Just keep vigilant on watching your payments to make sure they are paid on time from here on.

Any who, these are the pieces you need to know for magnificentcy (again not a word). Keep this information close to heart (or your brain) and save yourself a whole bunch of money over you lifetime by paying less interest. And keep reading the other blogs to learn more about all other areas of finance.