Your credit score has an impact all out of proportion to most people’s expectations. It can cost you thousands in extra interest on your mortgage by forcing you to borrow at a higher interest rate. It can make it difficult to buy on installment plans, or get credit cards. It can even affect your ability to get a job. So increasing your score is a worthwhile goal. But how can you improve your credit score? Here’s some quick tips to make building a good score easier.
Check Your Score
Before you can know you are improving your score, you need to know what it is, and how it got there. You can check your credit score for free, once a year, with each of the three credit bureaus. These checks have no impact on your score, only potential lenders checking your credit lower your score (and only a small, temporary amount). Review your credit report thoroughly and contact the bureau with any mistakes. You can petition to have mistakes removed and your credit score will go up immediately if that mistake was dragging it down.
This is one of the few ways you can have such a sudden change in credit score. You can also note payment problems and contact the lender and ask them for ‘forgiveness’ of your late payment. Many lenders will eliminate reports of late payments for reliable long-term customers. Finally, analyze what parts of your score are low and you can work to change.
Diversify Your Debt
One simple area is having only installment loans or having only revolving credit. Installment loans are ones like your mortgage or car payment. They are for a set amount of money and have a schedule of payments over an agreed upon length of time. An example is a typical mortgage with a fixed payment every month for 30 years. Revolving credit gives you a credit limit and allows you to spend up to that amount, paying off a minimum payment each period, but allowing you to keep a balance. Credit cards and lines of credit are revolving credit.
To maximize your credit score, you need to have both types. If you already have an installment loan, apply for a credit card. You don’t need to use it but having it available increases your score. Alternatively, you could apply for an installment loan to pay off a credit card, turning that revolving credit into term credit.
Let Accounts Age
While many people recommend cutting up credit cards once they are paid off to prevent you from running up more debt, closing accounts can actually harm your credit score. One measurement used to create your score is the age of your credit. How long you have had these credit accounts open. If you close one you have finally paid off, you are decreasing the average age of your accounts. Hide those cards away from yourself or set them up to make a regular utility payment and be paid in full each month, but don’t close them without considering the impact on your credit score. This can be even worse if you open many new accounts, such as applying for several credit cards at once. Each new account reduces the average age of your credit.
Keep Credit Usage Low
While it makes sense to only use as much credit as you can afford to pay, there is another reason to keep your usage of credit low. Credit Utilization is a measurement used to determine if you are maxing out your available credit. This applies mostly to revolving credit, credit cards and the like, and is simply the percentage of your credit limit you are using. If you use most of your limit, this reduces your score. Surprisingly, it doesn’t matter if you pay it all off every month, just using a high percentage impacts your score.
Here’s an example: With a one-thousand-dollar limit on your card, you make your car payment of eight hundred dollars each month. You pay the card off in full, but that still shows an eighty percent utilization. If you use your credit card for regular expenses each month, make sure to get our credit limit increased so this usage is less than thirty percent. Even lower is better, but above thirty percent lowers your score.
Make Payments On Time
This is the largest segment of your credit score, thirty five percent of your score is determined by your payment history. But confusingly, just paying on time doesn’t earn you points. Missing payments loses you lots of points, especially if they go to collections, but paying on time only prevents that loss and establishes a good payment history.
Today there are lots of tools to help avoid late payments. Setting up automatic payments through your bank can take care of any regular bills with set amounts, such as mortgage, car payment, phone, cable, or internet. Many utilities allow you to set up automatic billing and payment so they either withdraw the current month’s payment from your bank or send a message to your bank allowing it to generate a payment to them. These systems can eliminate some human error from your monthly bills.
As you can see, it’s not impossible to build strong credit, but most ways take some time to work. The basic idea is to behave in a financially sound way, so you look like a good credit risk. That’s all this score really measures, how likely you are to pay back money loaned to you. So make sure to clean up your report, have different types of credit, a long history, low usage, and always pay your bills. A high credit score will be your reward for managing your money well.