Your credit score is a key factor in how quickly and easily you can achieve financial goals like buying a home. That three-digit number has a say in everything from the kinds of credit cards you can get to the types of loans you qualify for.
A higher score generally means you'll qualify for lower interest rates and can save thousands of dollars over the life of a loan; a lower one has the opposite effect. Your score isn't static, though. Making smart financial moves can help you raise your score.
And although the pandemic was hard on millions of Americans and their finances, it also gave lots of people a chance to make some of those smart money moves. New data shows that, overall, Americans used this time to improve their overall credit health and their scores.
The median credit score nationwide rose 11 points between February and October of last year, according to a study by the Urban Institute. What's more, when researchers isolated the data by race, they found that credit scores were up for all groups.
The jump is particularly noteworthy in communities where Black Americans and Native Americans are majorities: Those geographic areas saw bumps of almost 20 points in their credit scores.
The bump in credit scores across the board is a very good thing. Still, the data also shows that the credit gaps among racial groups remains: The median score for white Americans, for example, consistently remained 20 points above national median, while scores for Black Americans, Latinos, and Native Americans were well below it.
The improvement is likely due to various policies like loan and rent forbearance that were enacted early in the pandemic to stem the broad economic fallout, says Signe-Mary McKernan, an economist at the Urban Institute who worked on the study. The persistent disparities among racial groups is a red flag that indicates potential setbacks with a longer-term, equitable recovery, she adds.
"Without sustained support and intentional policies that address some of the racial barriers we're seeing, the economic impacts of Covid could create major setbacks," McKernan says. "I think we're looking at a ticking time bomb."
Video by Stephen Parkhurst
The data doesn't reflect people's current situations, McKernan explains, and those unknowns could be a big problem once pandemic protections are lifted. "If you had a qualifying loan that was current before these accommodations were put into place, then it's still reported as current," she says, even if people won't be able to repay it after the pandemic.
When those bills come due, they could put affected families into crisis.
The $1.9 trillion Covid relief bill currently being debated in the U.S. Senate extends many pandemic protections through the summer. During that time, Americans will likely be able to continue saving and improving their credit health.
"Credit scoring is all about how well you manage your money, not how much money you have," Ted Rossman, industry analyst at Bankrate, told Grow last year.
To improve your score, it helps to understand what goes into it. Your score is based on information in your credit report. Your payment history is the most influential factor, accounting for a little more than a third of your score.
Here are three simple things you can do to improve your score:
- Use less of your available credit. "The most impactful thing that consumers can do to quickly improve their credit score is to lower their credit utilization ratio," Rossman told Grow. Your credit utilization ratio — that is, the amount of credit you're currently using divided by the total amount of credit you have available — is second only to payment history when calculating your credit score. Keeping old cards open, paying down debt, and strategically using balance transfer offers can help.
- Make payments on time. Late payments ding your score, so set up automatic payments or reminders to ensure you pay on time every month.
- Pay off your balance in full. Credit cards have some of the highest interest rates overall, so paying your full balance each month helps. Paying off the balance each month also improves your credit utilization, especially if you tackle the balance before your statement closes. "Queer Eye" star Bobby Berk found that paying a few days early boosted his score by nearly 150 points because it looked like he was using less credit. "I watched my score go from the low 700s to 840 or 845," Berk told Grow.
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