Your credit score can mean the difference between a high- or low- interest loan, whether or not you get approved to rent that apartment you want, or even affect whether or not you get a job. So, having a great credit score is an important piece of your overall financial puzzle. What is a great credit score, you ask?
Credit scores range from 300 to 850 on the FICO charts. A score of 670 to 739 is considered “Good.” Most apartments will approve a score above 650, and 760 or better will get you the best interest rate on a mortgage. FICO scores are calculated based on your credit payment history, length of credit history, amounts you owe, and types of credit you have used. Over 90% of financial institutions in the U. S. use FICO scores to determine if you are a good risk or a bad risk – if you are worth the risk to insure, hire, or loan money to. You have three credit scores – one from each of the major credit bureaus (Experian, TransUnion, and Equifax).
What if you’ve had some financial trouble in the past and your credit score is below 669 in the Fair to Very Poor range? How can you improve that score so that you will qualify for decent interest rates on your next car or qualify to buy a house or even get insurance? Here are five smart things you can do.
- Correct your credit report. Federal law allows you to get one free credit report each year from each of the three major credit bureaus. You can get all three through the annualcreditreport Once you have the report in your hands, check it thoroughly for errors. If it shows late payments or incorrect amounts due, be sure to follow the directions on the report to dispute and correct any inaccurate information.
- Pay your bills on time. This is the best way to keep a good credit score. Whether it’s this month’s mortgage, a car payment, or your phone bill, paying your bills on time (or early) helps to keep your credit score moving up. If you need help keeping track, consider automatic payments through your bank account or set up a bill reminder system on Google calendar or by using one of the many billminder apps out there.
- Pay down your balances. Thirty percent of your credit score is based on the amount of money you owe. If you have high balances, pay them down as quickly as you can or make payments twice a month, if possible. Even if you pay your credit card bills in full at the end of each month (which you should), if the amount owed on a card is close to or equal to its limit, your credit score will go down.
- Pay all outstanding bills. If you have let some bills slide, pay them off – especially if they have already been sent to a collection agency. Late payments remain on your credit report for seven years, but they eventually cycle off the report, increasing your credit score. If you have a 401(k), you can take a loan from it to pay off your debts. A loan from your 401(k) is not reported to the credit bureaus and will not affect your score.
- Keep old accounts, and don’t open new ones. The older your credit record is, the better. It shows you have a history of being able to manage your money. If you have old credit card accounts with zero balances that you don’t use anymore, keep them open (just hide the cards in a safe place). Their credit limits will add to your overall credit limit and help reduce your credit utilization ratio. If you have $10,000 in credit limits, but only $3000 in outstanding balances, your credit utilization ratio is 30%. Your goal should be to keep this ratio under 30% all the time, though there is no magic percentage that makes your score go up or down. Opening new credit card accounts can lower your account age and, therefore, your credit score, so only open new accounts when you absolutely need to, and don’t open several at once. Never open a new credit card account to transfer debt from another card!
If your credit has taken a hit due to an unforeseen circumstance, send letters of explanation to the credit bureaus. If you were out of work due to a medical event or had a fire in your home, but are now back at work and on track, writing a letter to explain what happened may help.
Your credit score can save you a lot of money in the long run by reducing interest rates on loans, slashing utility deposits, setting you up for better insurance rates, and even getting you a better job. It pays to take care of that score. We hope these five smart tips will help you improve your credit score and make you a financial rockstar.