Is your credit (FICO) score helping you or hurting you? Were you recently denied credit or a good interest rate because of it? There are a few things you can start doing right now to up your score and begin building better credit which can improve your overall financial health.
An excellent credit score is very important because it impacts interest rates and credit offers you receive which can save you a significant amount of money over time. With a higher score you are seen as lower risk to lenders which gives you more and better options to choose from.
But, how do you move towards a perfect 800+ and is it even attainable? According to research by Fair Isaac Corporation, the company responsible for FICO scores, the percentage of Americans with top-notch credit scores is the best it’s been since 2008. However, many Americans remain stuck in credit limbo with credit scores that aren’t bad but still not good enough to get them the lowest interest rates on car loans and mortgages. There is no magic to instantly obtain a perfect score and you should be cautious of anyone who tells you otherwise. But, with some simple strategies and good planning you can begin elevating your score.
1. Check Your Credit
Always know where you are with your credit. The best first step to begin repairing your credit is to obtain your reports from the three major reporting agencies (Equifax, Experian, and TransUnion). You are entitled to a free credit report each year at annualcreditreport.com. It is also a great idea to sign up for a reputable credit monitoring service where you can check your credit throughout the year and get alerts if anything has changed. This will allow you to fix what’s broken now and be immediately alerted to new items so you can address incorrect issues going forward.
2. Dispute Inaccuracies
Once you’ve reviewed your credit, immediately clear up any errors, such as incorrect credit limits, late payments, collection items, or accounts that simply aren’t yours. You’d be surprised by how many errors actually appear on credit reports and are easily removed. Make sure your name and address are correct, review any judgments or public records for accuracy, and look for items older than seven years which should be removed. Each credit bureau has a dispute format but we advise our clients to follow a specific procedure to dispute inaccuracies which will help protect your rights under the Fair Credit Reporting Act (FCRA). CLICK HERE for a useful Credit Report Dispute Package.
3. Pay On Time
Delinquencies have the biggest negative impact on your credit score. Late payments are reported once you’re 30 days late and just one delinquency can drop your score as much as 100 or more points. Even if you’ve missed payments in the past, which will remain on the report, a good payment record going forward will definitely begin to improve your score. If you have overdue bills, set a plan in place to get them caught up and try to avoid having them go to a debt collector which can further blemish your credit.
4. Pay Down Credit Card Debt First
Paying down the amount you owe can help improve your score, but if you have limited funds, plan to pay credit card balances down first rather than installment loan balances such as mortgages or car loans. Paying back the accounts with the highest interest rate first will save you some money over time. However, the best way to help your score is to pay down the accounts that are closest to their limit. The goal is to decrease your current debt to available credit ratio (utilization ratio).
5. Avoid Maxing Out
Try to keep your balances below 30% of your credit limit even if you pay them in full every month. It’s better to have multiple cards with balances below 30% of your limit, than to have one card which is always maxed out. Creditors report the total amount you charge each month to the bureaus, so even cards you pay in full each month can negatively affect your rating if you are close to or over the limit.
6. Keep Older Cards Open and in the Mix
Even though it seems like a good idea to cut them up and close them out, it is actually better to keep those old cards open and occasionally use them. Cancelling a card can actually bring your score down since these cards still play into your utilization ratio. Use older cards occasionally for small purchases and pay them off. It shows a longer credit history and will help improve your score.
7. Shop for Credit Quickly
Your credit score gets pulled every time you apply for credit. When you decide to go out and purchase a car, get a credit card, or obtain a mortgage, plan ahead and submit applications to creditors within a two-week window. Your credit can get dinged for every inquiry if they are spread out but the system treats a close cluster of credit inquiries more favorably.
8. Diversify Your Credit
Mixing it up with different types of credit can help improve your score. Although this is a smaller aspect in the scoring process, it does help to have more than just credit cards as part of your credit history. Examples include installment loans such as a car loan or a mortgage, revolving credit such as a home equity line of credit, secured credit, or student loans.
Components and their values which comprise a FICO credit score:
- Payment History 35%
- Amounts Owed (debt to available credit ratio) 30%
- Length of Credit History 15%
- New Credit 10%
- Types of Credit 10%
Improving your score takes time, but it can be done. Even if your credit is not perfect now, it is better to face it head on and begin improving it one step at a time. The higher your score, the more likely you are to be approved, and with better terms.