Want Better Credit? Know the Score.

in Your Life, Your Money

Do you know what your credit score is?  Or, do you already know it and wish it was higher? Your credit score is important to your financial health; it demonstrates to lenders how responsibly you use credit. The higher your score, the easier it is to get new loans or lines of credit. Here’s a step-by-step guide to help you achieve a better credit score:

1. Start by reviewing your credit reports

It’s important to know how you are currently viewed by lenders.  You can get a free copy of your credit report once a year from each of the three major national credit bureaus (Equifax®, Experian® and TransUnion®), through the official AnnualCreditReport.com website.

By the way, credit report errors are not all that unusual. If you discover an error, be sure to have it corrected or removed from your file.

2. Stay on top of bills

FICO credit scores – the most widely used – consist of five factors:

  • Payment history (35%)
  • Credit usage (30%)
  • Age of credit accounts (15%)
  • Credit mix (10%)
  • New credit inquiries (10%)

As you can see, payment history constitutes the most significant part of your credit score. Simply by paying your bills on time, you are off to a strong start in boosting your score.

3. Use credit less

How much of your credit limit are you using at any given time? That’s important, because your percentage of credit utilization is the second biggest factor in determining FICO scores.

There’s an easy way to keep your credit utilization in check: pay off your card balances in full each month. If you can’t always do that, a good rule of thumb is to keep your total outstanding balance at 30% or less of your total credit limit. It’s another helpful way to see your credit score grow.

4. Limit new credit—and “hard inquiries”

Your credit history can be examined in two ways: so-called “hard” and “soft” inquiries. Hard inquiries can negatively affect your credit score. They include applications for a new credit card, a mortgage or other credit. Occasional hard inquiries are unlikely to have negative implications; too many in a short period of time, however, can reduce your score.

Soft inquiries might include checking your own credit, or checks performed by financial institutions and other credit card providers that access your file to determine whether to send you preapproved credit offers. Soft inquiries will not affect your credit score.

5. Keep old accounts open

The age-of-credit portion of your credit score looks at how long you’ve had credit accounts. The older your average credit age, the better you look to lenders.

If you have old credit accounts you’re not using, don’t close them down. Though the credit history for those accounts would remain on your credit report, closing credit cards while you have a balance on other ones would lower your available credit and increase your credit utilization ratio. That could knock points off your score.

6. Take action to eliminate delinquencies

If you have delinquent accounts, charge-offs or collection accounts, take action to resolve them. For instance, if you have an account with multiple late or missed payments, get caught up on the past-due amount, then work out a plan to make on-time payments going forward. That won’t erase the late payments, but it will improve your payment history.

Paying off collections or charge-offs might also offer a modest score boost. Remember, negative account information can remain on your credit history for up to seven years—bankruptcies for ten.

7. Look into consolidating debts

If you have a number of outstanding debts, it could be to your advantage to take out a consolidation loan and pay them all off. Then, you’ll just have one payment to deal with; if you’re able to get a lower interest rate on the loan, you’ll be in a position to pay down your debt faster as well. That can also improve your credit utilization.

You can also consolidate multiple credit card balances by paying them off with a balance transfer credit card. Look for a card that offers a promotional rate of 0% interest on your balance.

8. Use Credit Monitoring to Track Your Progress

Credit monitoring services are an easy way to see how your credit score changes over time. These services, many of which are free, monitor changes in your credit report, such as a paid-off account or a new account that you’ve opened. They typically also give you access to at least one of your credit scores from the credit bureaus, which are updated monthly.

Credit monitoring services can also help you prevent identity theft and fraud. For example, if you get an alert that a new credit card account has been reported to your credit file, you can contact the credit card company to report suspected fraud.

The goal: better credit

Improving your credit score is always a plus, especially if you’re planning to apply for a loan to make a major purchase, such as a new car or home. Remember: major changes won’t happen overnight, but the sooner you begin working on it, the sooner you will see results.