Insights & Stories

The Experts' Guide to a Healthy Credit Score

Reading time: 6 Minutes

April 17th, 2018

Whether you just started focusing on building your credit, or you've been actively working towards that goal, “understanding the factors that impact your credit score is key,” says Bank of Hawaii Vice President and Market Manager Keane Santos.

To get your credit score to its optimal level, you'll need to know how the rating process works. Your score, sometimes called a FICO score, is rated from a low of 300 to a perfect score of 850, and is comprised of five criteria: payment history, credit card utilization, average age of credit history, credit mix, and credit inquiries.

Addressing those key areas is necessary in maintaining—and even increasing—a high credit rating. Here are five simple tips to help.

1. Make On-Time Payments

“If you already have good credit, it's because you're paying your bills on time and managing your finances well,” says Santos. To ensure you're able to consistently make your credit payments, it's best to create a budget that lists all of your expenses and their due dates each month.

If you find yourself in a bind, being proactive about protecting your rating is key. At the very least, try to make the minimum payment required by your lender. If that's not possible, call your lender and ask about your options for an extension or deferring payment. Whether it's a one-time incident or a more serious issue, like losing your job, being open and honest with your lender about your situation may result in the best possible solution for both sides—and can prevent damage to your credit.

Keane's Highlights:

  • Payment history makes up about 35 percent of your credit score, and is the most important factor to consider.
  • Late payments reported to credit agencies will take 7 years to fall off your record.
  • Generally, lenders will report a late payment if it's more than 30 days past the due date.

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2. Manage Your Available Credit Card Balances (Don't Max Out Your Cards)

A rule of thumb: Avoid using more than 50 percent of your total available credit. If you have to make a large credit card purchase, work quickly to pay it off as soon as possible.

At times, you may not be able to take care of the entire debt balance in one payment—not to worry. This is when it's especially important to make a budget. Calculate a payment plan that's comfortably within your means to chip away at the debt. If you have multiple cards, make extra payments on the card that charges the highest interest until the balance is paid, then move to the next card. While your score may be negatively affected when you've used more than 50 percent of your available credit, it will begin to recover as you work to pay down your debt.

Keane's Highlights:

  • Credit card utilization makes up about 30 percent of your credit score and is the second most important factor affecting your rating.
  • The best approach from a credit-rating agency's position is to pay your entire credit card balance every month.
  • Utilizing between 0 and 10 percent of available credit is considered excellent by most credit rating agencies.

3. Be Patient and Disciplined While You Establish Credit History

Credit history is the repayment of debt over time. The age of your credit history is calculated by taking the average age of all open credit accounts. For example, if you have a loan that has been open for 5 years and a credit card that has been open for 1 year, the average age of your credit history would be 3 years (5 plus 1 divided by 2).

If you pay off a loan or close a credit card, it no longer counts toward your credit history. If you have an older loan or credit card, paying off the loan or closing the credit card could lower your credit history age and impact your credit score.

When it comes to loans, credit agencies will generally raise your score when you fully repay a loan. With credit cards, it's best to keep your older cards open, even if you don't use them often, so the closures don't lower your credit history age.

Keane's Highlights:

  • The age of your credit history makes up about 15 percent of your credit score.
  • For an excellent rating in this credit history category, lenders want to see you make responsible, on-time payments for a total average of 7-10 years.

4. Having a Range of Credit Accounts is Beneficial

Rating agencies prefer that borrowers have a combination of credit types—a mortgage, credit cards, student loans, car loans, personal loans. The more accounts in good standing, the better for your score. It's also helpful to own different types of credit cards. Bank credit cards are the most useful, but it also helps your credit mix to have a frequent flyer, department store or gas station card.

Keane's Highlights:

  • The credit mix makes up about 10 percent of your credit score.
  • Not using a credit card will not negatively affect your score, but it may cause a lender to lower your available credit, so open credit cards you are likely to use.

5. Be Aware of the Amount of Hard Credit Inquiries on Your Report

When applying for new credit, ask the lender if they will be conducting a hard or soft credit inquiry. Soft checks, which are a background credit check, don't show up on your credit record. But hard checks, which is when prospective lenders look at your report to decide whether to lend to you, do.

A hard inquiry will generally cost you five credit points, and each new hard inquiry within a two-year period will negatively impact your credit score. Credit agencies generally consider two to four hard inquiries within a two-year period reasonable.

One way to apply for new credit accounts without negatively affecting your score is to look for accounts that offer a pre-approval process rather than a pre-qualification process. Pre-approval means you have already been approved for the credit, so no credit check will be necessary, whereas pre-qualification almost always involves a hard check.

Keane's Highlights:

  • Credit inquiries make up about 10 percent of your credit score.
  • Hard inquiries remain part of your record for two years.
  • A declined credit application does not affect your score.

In Summary

The most important factors in maintaining a healthy credit score are making your payments on time and not utilizing too much of your available credit. Those two factors combined make up about 65 percent of your score. From there, being thoughtful about which cards and loans you apply for and maintain is the making of a winning strategy. It takes time to build great credit, and it takes discipline to maintain it.

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