Good credit is essential to achieving many of our other financial goals. Buying a home, financing a new car, or returning to school almost always requires a bit of credit assistance to make that dream come true.
Your credit score, also known as your FICO, is a sum of predictive analytics that tells how likely you are to pay your debt on time and how responsibly you use credit. Essentially, if you were good at paying your bills in the past, creditors are pretty sure you’ll exhibit that same behavior in the future, and that lowers their risk of extending you more credit. Credit bureaus place the most emphasis on your more recent payment behavior, so making a concerted effort to tackle these tips can help improve your score.
1. Keep Balances Relatively Low
How much you’ve charged relative to your total available credit is a key factor in calculating your credit score. For example, if you have a credit card with a $5,000 limit and you’ve charged $1,500 on it, that’s a 30 percent credit utilization rate.
Most lenders recommend that you keep a credit utilization rate of 30 percent or less. This is often calculated across all of your credit lines. If you have a few open cards that you don’t regularly use and have zero balances, they can actually help demonstrate purchasing discipline and up your score.
2. Pay Off Small Balance Cards
Part of your credit score is calculated by looking at how many cards you have with balances. If you’ve gotten in the habit of having many cards with small dollar balances, it’s probably worth focusing on paying those off. You’re better off picking just one or two go-to credit cards that you use for your major purchases. Select those based on the best rate and offers for your personal financial situation.
This tip is also the beginning of the debt snowball payoff strategy cheered on by many financial professionals. Getting rid of the small debts you owe (often times at higher rates) can give you that psychological boost to tackle bigger payments down the road.
3. Maintain Old Credit Lines
When you’ve handled debt responsibly over a long period of time, your credit score picks up. The longer you have a personal credit history, the better it is for your credit score. Thinking of closing that small dollar card you’ve had since high school? Think again. You may want to leave it open if you’ve had a solid repayment record, it’s a no-fee card, and you’ve kept both the balance and total credit line low.
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4. Schedule Your Payments
Nothing tanks your credit faster than sporadic payment history. With the laundry list of great apps and calendar reminders out there, there’s no excuse for us to miss a credit payment! For most creditors, you can set up an auto-pay at the time of account opening, which will directly debit from your checking account. If that’s not an option, your own bank will offer the ability to schedule a monthly payment. (Boss tip: breaking that payment into two monthly installments can also actually help lower the total amount you pay over time, since you’re reducing the principal balance more quickly.)
5. Look at Your Credit Score
This one may seem simple, but many times we’re inclined to ignore money matters that stress us out. Credit ignorance is not bliss, so get used to scheduling an annual reminder to get a free copy of your credit report. Checking your credit report is especially important if you’re planning on a major purchase in the next several months. You’ll be able to see where you may need to make improvements, and this “soft” inquiry to your credit will have time to fall off.
Apps like Credit Sesame and Mint are great places to organize your debt, get payment reminders, and some can even give you a sample credit score. (Keep in mind that most of these scores provided through the apps aren’t your exact FICO score, but can give you a general range of what creditors would be seeing.)
6. Think Beyond Credit Cards
Credit cards seem to be the “debt” we most quickly think of. Remember, our credit score is composed of all our owed balances, so don’t forget to keep an eye on all of the bills! This includes auto loans, student loans, and even utilities like your phone bill and public services. (And means it’s all the more important we start responsible financial habits early in our lives.) Reading your credit report is one of the best ways to ensure you are thinking of all of those non-card payments that affect your score.
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7. Understand Negative Reporting
Negative information stays on your credit report for seven years and will lower your score. While we often think of late or missed payments as the tough stuff, keep in mind that settling an account for less than you owe is unfortunately going to lower your score. A settlement also does not remove the problem from your credit report, so it’s essential to understand the full terms of a “re-negotiation” if you’re working through a debt that you can’t pay in full. While it’s always better to pay something in a settlement than not paying or declaring bankruptcy, be sure you think through all of your options if payment troubles strike.
Have you turned around your credit score? What tips did you use?