by Keith R. Davenport, CFP®, MPAS, RICP®
What's in this Article:
- Capitalize on Credit Utilization
- Hard Checks vs. Soft Checks
- Examples of Hard Pulls
- Examples of Soft Pulls
- Be Strategic about New Credit
Last month, we met Maya whose apartment-rental application was denied. A forgotten medical bill, a maxed-out credit card from when her car broke down, and late payments she’d brushed off as no big deal had lowered her credit score. It wasn’t irresponsibility so much as being overwhelmed and the belief that it was too late to fix her credit.
There were no shortcuts or dramatic transformations to raising Maya’s credit score, just small, uncelebrated steps. She made her payments on time, avoided medical debt, started an emergency fund and talked to her creditors. In the last installment of this two-part article, we’ll share the final strategy Maya used and one that you can use to rebuild your credit score, too.
Capitalize on Credit Card Utilization
The credit utilization ratio is the amount of credit you use compared to your total credit limit. In general, lower utilization is better because it signals responsible debt management. Once your utilization rises above 30%, your score may decline; many people aim to use 20–25% of their credit limit or less. Also, don’t close older credit accounts just because you rarely use them. Closing an account can reduce your available credit and increase your overall utilization ratio. Closing an older account will also affect the credit history portion of your score, since the longer you have had credit the higher the score is for that portion.
Hard Checks vs. Soft Checks
Opening new credit accounts can help or hurt your score, depending on timing and how you manage the account.
Hard credit checks (also called hard inquiries or hard pulls) happen when you apply for new credit. They can lower your score by a few points. Hard inquiries stay on your credit report for up to two years, but their impact typically fades over time.
Hard pull examples include applications for:
- A mortgage
- Auto loans
- Credit cards
- Student loans
- Personal loans
- Apartment rentals
Having many hard inquiries within a short time frame can have a bigger impact on your score because lenders and scoring models may view multiple applications as a sign of risk.
A soft inquiry or soft pull reviews information from your credit reports but isn’t connected to an application for new credit. Soft pulls such as checking your own credit or certain employer background checks don’t affect your credit score. These inquiries are visible only to you; lenders and other third parties generally can’t see them or use them in lending decisions.
Examples of soft pulls include:
- Checking your credit score
- “Prequalified” credit card offers
- “Prequalified” insurance quotes
- Employment verification for background checks and the like
Be strategic about new credit. Because new credit and recent inquiries can affect your score, apply only when needed. If you’re shopping for a loan rate, try to submit applications within a short window so inquiries are grouped together. And if you do open a new account, keep balances low and make every payment on time.
How Did Maya Do?
Some months Maya was discouraged. The number didn’t move. Or it dropped by two points for reasons she couldn’t understand. But she didn’t give up. She reminded herself that progress wasn’t loud. It was quiet and cumulative, like compound interest or learning a new language.
A year later, she reapplied for an apartment. When the approval email came through, she smiled. The number was higher now, but more importantly, it no longer defined her. It was just a tool, and Maya knew how to use it.
The information contained herein is for informational purposes only. While MMBB made every attempt to ensure that the information is accurate, MMBB is not responsible for any errors or omissions or the results obtained from the use of this information. MMBB is not liable for any success or failure that is directly or indirectly related to the use of the information contained herein. The information contained herein does not constitute any financial, insurance, investment, legal, or tax advice. In no event shall, MMBB and/or its fiduciaries, directors, officers, employees, or agents thereof be liable for any special, direct, indirect, consequential, or incidental damages or any damages whatsoever, whether in action of contract, negligence or tort, arising out of or in connection with the use of the information contained herein.
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