How Credit Works
Tips for Improving Your Credit Score
In our last “How Credit Works” post, we briefly touched on what goes into to calculating your FICO credit score. While that is all great information to familiarize yourself with, it’s more important to be aware of what YOU can do to improve your score if it is low, or maintain it if it is high. Here are 4 quick things that you can do to have a positive impact on your credit score, and therefore your financial situation:
- Measuring is Improving, Knowledge is Power, Check you Score!
The first step is to be aware of what your score actually is, and how it compares. This is also the only way to identify if there any outstanding issues with your credit history you may not be aware (this is a common issue!). There are several ways to go about reviewing your report. You can sign up for a credit monitoring service, or take advantage of many credit cards that have started offering this service free to cardholders. You can also ask any credit company that checks your score for a copy of your report and for the scores themselves. www.annualcreditreport.com is a popular place to get a free copy of your report from all 3 bureaus, but it will not give you an actual score. For comparisons sake, you’ll find that anything above 680 is fair, between about 681 and 740 is good, while above that is considered great credit.
- No Matter What, Don’t Be Late!
Things happen, and sometimes the temptation is there to let bill-payment slide. Some people I talk to underestimate the life-impact of making a late payment, even on small credit cards. There may be times when you have no choice but to hold off making payments, but this should absolutely be a last resort. Even if you are just making minimum payments, make them on time. Getting behind can cost you greatly.
- Use Your Cards, but Know Your Limits!
There seems to be a special place in the heart of the credit score formula for 20% credit usage. This means that using your card is great, but keeping your highest balance under 20% of the limit of that card is the ideal. If you must breach the 20% level, try not to go above 35%, which could be another breaking point. You want to appear to the bureaus that you are someone who uses credit, but not someone that is relying on credit. It’s a tough balance, but it makes sense that it would make you a creditor’s target client.
- Pull My Credit? Not So Fast!
Applying for credit is fine, but don’t overdo it. Inquiries into your credit report have an immediate but typically a slight impact to your score. However, if you rack up too many different types of inquiries over a short period of time, or have your credit pulled too frequently, the impact could be greater. Don’t be afraid of applying for credit when necessary, but be cognizant of giving your personal information and Social to a representative if you are not ready to move forward on a new account or transaction.
More information on credit scores to come in the near future, but this is a great start. If you install these 4 steps into your daily life, it will give you a leg up on your credit scores, and may save you thousands of dollars in the long run.
- Here are a couple links I referenced to make this post. Feel free to check them out as well!
- Annual Credit Report FAQ
- Investopedia (Although as a lender, I disagree with their definition of “good”
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