Understanding Credit Scores and How to Improve Yours
Your credit score is a number that helps lenders assess whether you’re worthy of taking out a loan. A high credit score will enable you to receive better interest rates and terms on your loans, saving you money in the long run.
Your score is determined by several factors, including payment history, amount owed and length of credit history. Having a balanced mix of accounts on your record can help boost the strength of these factors in favor of increased score improvement.
Pay Your Bills on Time
Bill payment history is one of the key components that determines your credit score. Missed payments could result in late fees, penalty interest rate increases and account status changes that all have a detrimental effect on your score.
When calculating your credit score, the three major consumer credit bureaus take into account your payment history. The more often you make payments on time, the higher your score will be.
Start by writing down all of your bills and creating a schedule for paying them off. You can add these dates to your calendar or scheduler, and use reminders on your phone as needed.
Keep Your Credit Card Balances Low
Maintaining low credit card balances is an essential step to building and protecting your credit. It lowers your utilization ratio, which accounts for up to 30% of your overall score.
Keep your credit utilization low by paying off your balance in full each month and not adding to it. Furthermore, set up alerts with your card issuer so that you are notified when the balance on your account reaches a specific percentage of its credit limit.
Another way to keep your credit utilization rate low is by asking for a credit limit increase from your card issuer. If you have a card with an elevated limit and low balance, increasing the limit could reduce utilization, helping boost your credit score.
Credit utilization rates aren’t an exact science, but a low credit utilization rate indicates you use your revolving credit responsibly and demonstrate financial responsibility to lenders. This is especially important if you’re carrying debt from month to month on multiple cards which could negatively affect your credit scores.
Avoid Closing Accounts
Maintaining a healthy balance of credit accounts is essential for maintaining your FICO score. But closing too many accounts could cause the utilization ratio (the percentage of available credit you use) to rise, potentially knocking some points off your score.
To minimize the damage, focus on using only a handful of cards that you use frequently. Once those accounts close, try to pay off your debt quickly so as not to have a negative credit impact.
Maintaining old accounts will also help boost the average age of your credit history, which lenders take into account when calculating your score.
Additionally, the longer your credit history, the better. However, if your account is closed due to late payments or another reason, that can also leave a negative mark on your report which can remain for years, according to McClary. So be sure to reach out to the bank and request they reconsider, she advises.
Check Your Credit Report
Your credit report is an invaluable asset when looking to purchase a home, get a loan or secure insurance. Lenders, employers and landlords all use it as the basis for determining how much to loan you, how much interest will be charged and whether or not you have the ability to make timely payments. Your report also helps them assess if someone will likely repay their obligation on time.
Each of the three major credit reporting agencies has its own method for calculating your credit score, but they all share information about you and any accounts that you have with them.
Regularly checking your credit report at least once annually is recommended. Doing so will alert you to any changes in the state of your credit and give you time to create a plan for improving it.
Additionally, you should check your report for signs of identity theft. If someone is opening new accounts in your name or claiming you as a debtor, contact the credit reporting agencies right away to alert them.
