How to Improve your Credit Score
Building, improving, and maintaining your credit score can seem like a daunting task, especially when you’re not particularly sure what the scores consist of. Each of the three major credit reporting agency carry slightly different weights on the factors that they take into consideration, leaving you wondering what to prioritize.
Why should your credit score matter to you? Any time you apply for credit, or a loan, the creditor will look at your credit score and make a decision whether or not to extend credit to you based on your past and credit history.
No matter what your current situation is, building and maintaining a good credit score can often times be a decade or lifelong pursuit. Be smart and patient, and good things should happen. The lack of clear guidelines can be frustrating and even contradictory at times, but I’ll provide you with a list of best practices to follow.
Your FICO Credit Score Range
Before we get into ways to improve your score, let’s take a look at what a good credit score number is. Everyone has a slightly different view on these ranges, and with market changing events such as the current credit crisis, lenders may be more strict in what they consider ‘good’, or ‘excellent’, or which categories they are willing to give a loan or the best rates to. FICO scores typically range from 300 to 850. In general:
- Excellent: over 750
- Good: 720 or more
- Acceptable: 660 to 720
- Uncertain: 620 to 660
- High Risk: Under 620
The average credit scores for Gen X and Gen Y fall in to the worst two categories, respectively.
So, how can you improve and maintain a high credit score?
1. Pay your Bills on Time
This is the biggest contributor to a healthy credit score, making up 35% of your credit score. Even one late payment can result in a significant drop in your credit score (50 to 100 points or more). If you are late on accident, pay the amount immediately and speak with your creditor about reversing any late fees.
The same rules apply to bank overdrafts and bounced checks. Although they may not go directly on your credit report, they could come back to haunt you when it’s time to take out a mortgage. Banks do share info. with each other.
I strongly recommend setting automatic payments on your bills so that you don’t forget to pay on time like I have done a number of times in the past (and each time I swear it will be the last).
2. Monitor your credit reports
You are allowed 3 free credit reports annually, by law through annualcreditreport.com, which is a joint venture of the 3 major credit reporting agencies (Experian, TransUnion, and Equifax), and is mandated by the federal government. It’s the only site you should get your credit reports from (ignore the catchy jingles). If you notice any inconsistencies, incorrect information, or accounts that were not created by you, file a dispute with the credit agency immediately.
Credit reports will show you all of the accounts that you currently have open, how long they’ve been open, how much was paid each month, when accounts were closed, who requested your credit report and when, and any major problems. All good information to stay on top of.
3. Keep your credit card balances low
Your credit score can improve if you lower your balance to available credit utilization ratio. This means paying down your debts so that you are using less of the credit lines that have been extended to you. Be aware that opening new accounts to improve this ratio can actually harm your score, so don’t use that as a strategy.
4. Spread Out the Opening of New Accounts
If you open a number of new lines of credit at the same time, it can signal a potential problem to the credit reporting agencies and have an adverse effect on your score. If you have a number of life changing events that will force you to open new lines of credit, try to space them apart by at least 6 months or more.
5. Don’t Be a Nomad
Obviously, if you have to move, you have to move. However, lenders like to see stability in your residency as it can point to a more solid financial foundation. This may be most applicable to those who switch apartments in the same area after every lease is up. Any time you go to apply for a major loan, particularly a mortgage, you will be asked your recent previous residencies and how long ago they were – most often the question is ‘if you haven’t live at your current residence for more than 2 years, list your previous residence’.
6. Don’t Job Hop
If you move from job to job without improving your financial standing, it can signal a red flag for creditors. In a way, it’s not much different than an employer looking at the same history. Frequent changing of your job indicates that you may not be around for long. In the case of a creditor, it indicates you may not have a steady income for long to pay off your bills.
7. Don’t Close Old Accounts
The length of time that you have had a solid credit history for is an essential element of a healthy credit score. This means that if you have any old accounts that you were thinking of getting rid of, you may want to consider holding onto them and keeping them open.
This may be a tough one for those who like to consolidate and free themselves from a large number of accounts (like me), but it may be best for you to just hold on to and not use them.
8. Use Bankruptcy as a Last Resort
Bankruptcy can knock hundreds of points off of your credit score and should only be used as a means of survival. Bankruptcy can stay on your file for up to 10 years and all but eliminates the possibility of you taking out a mortgage.
9. Lay Low when you Know you’ll Need a Loan
Many experts point towards the fact that you should not make any major credit moves at least a year prior to taking out a significant loan or mortgage. Any addition of new accounts, closing of old accounts, or late payments could shut down your plans.
10. Have Patience and Discipline
Building a good credit score requires patience (in the form of time) and discipline. Do the right thing, don’t be hard on yourself, stay on top of things, and attack your debt, and you should be able to build and maintain a good or excellent credit score.