How to Improve Your Credit Score

Your credit score is a key part of your financial life. It determines how much credit you can get, the interest rates you pay on your loans, and how much it might ultimately cost you to buy a house or a car, among other things.

A lot of information about your financial habits goes into your credit score. That includes whether you pay your bills on time, whether you’re using too much of the credit you have available to you, and the length of time you’ve had your credit accounts and loans open.  But credit scores aren’t fixed in stone. They can change based on how responsible you are as a borrower. So, if your credit is bad, there are things you can do to improve it.

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What is credit score?

Credit Score

A point-based rating system that assesses how responsible you are with loans and debt over time.

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Tactics and considerations:

• Check your credit reports regularly. There are three agencies that compile your credit history, which is used to determine your credit score.  If anything is wrong—for example, your credit report lists accounts you didn’t open, or lists accounts as still open that you can prove you closed—contact the credit bureau and tell them there’s an error. The bureaus have an obligation to correct the information. You’re also entitled to one free report from each reporting agency every 12 months.

You can learn more about credit bureaus and how to get your credit report here.

• Don’t use too much of your available credit.  A general rule of thumb is to never use more than 30% of the credit you have on all of your cards. Your unpaid balances are called your credit utilization rate, which also affects 30% of your credit score.
• Don’t apply for too many cards. Every time you apply for a new card, lenders perform what’s known as a hard credit check, which can harm your credit score.
• Pay down your debt. The less you owe, the lower your credit utilization rate will be, which can improve your credit score.
• Consider keeping your credit card accounts open once you’ve paid off your balances. If you have a high credit line with no, or very little, debt, it could help your credit score. Keeping accounts open can also help you develop a credit history, which is another important component of your score. Lenders want to see how well you manage credit over time.
• Pay your bills on time. Credit card lenders report late payments to credit bureaus, typically if you’re more than 30 days late. So may phone and cable companies, and anyone else who you may owe money to each month, if you stop paying and your bills are sent to collections.
• Having a variety of loans could help your credit score. If you only have credit card loans, your score might be different than if you had a mortgage, a car loan, and other loans. That’s not to say that more debt is good. Instead, having different loans can show lenders you’re responsible with a variety of credit types.

Good to know:  Credit scores were developed by a company called Fair, Isaac Co., and for that reason, they are sometimes referred to as FICO scores. Credit scores run from a low of 300 to a high of 850, which is considered perfect credit. A score of 670 or above is considered good credit.

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What is credit report?

Credit Report

A credit agency file that contains information about your loan and credit account history.

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Example:

Credit Utilization Ratio

If you have a credit card with a credit limit of $400 and another with a limit of $600, you’d have total available credit of $1,000. Let’s say you owe $300 on one card, and $100 on the other. You’d owe $400, and your credit utilization rate would be 40%.

Try to get your credit utilization rate under 30%, or $300.

$1000 x 30%=$300

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What is credit limit?

Credit Limit

The maximum amount you can borrow on a particular credit card.

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