When it comes to scores, high numbers don’t only matter for your kid’s SAT. The higher your credit score, the better your chances of getting a loan and low interest rates on money you borrow.
Understanding how to boost your credit score – which credit bureau Experian says range from a “very poor” 350 to an “exceptional” 850 – is key to your financial health.
“Knowing the factors that go into determining your score … gives you the opportunity to make decisions that will move you towards an increased credit score and make sure you stay there,” says Kyle Whipple, partner at Custom Wealth Solutions.
Even if you earn a big salary or have cash set aside for an emergency, it’s still tougher to get a loan if your credit is bad.
Before you can improve your credit score, you need to know how your score is calculated.
Here’s what FICO considers when creating your score and steps you can take to boost it: (Nearly all lenders – 90% – use FICO scores for credit decisions, says Bankrate.com.)
Payment history (35% of your score)
When a bank pulls your credit file, they want to know if you pay your bills and pay on time. They want to find out how likely you are to pay them back if they lend to you. Past payment performance is viewed as a good predictive tool that you’ll make on-time payments in the future.
Credit blemishes like late payments should be avoided if possible. A history of overdue payments “paints you as a bigger risk” to creditors, warns Credit.com.
“It’s important to pay on time,” says Janet Alvarez, a personal finance expert at popular blog Wisebread.com. And, if money gets tight, it’s OK to pay the minimum balance, she adds. Just don’t pay late.
Tips to boost score: Pay on time. Don’t miss payments. And that includes all your bills, ranging from credit cards to your mortgage.
Set up auto pay or use bill-pay apps like Bill Minder or Bills Monitor so you don’t forget due dates. You can also use new free services, such as Experian Boost and UltraFico, that enable you to get credit for paying utility and smartphone bills in a timely manner.
And this is important: if you’re having trouble paying bills due to a job loss or health-related issue, contact your creditor immediately, Alvarez advises. If you’ve got a history of paying on time, they might agree to forgive a late payment and not report you late to the credit bureaus.
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Amounts owed (30% of your score)
Lenders want to make sure you’re not maxing out your credit lines. Why? It could suggest you’re overextended.
How much outstanding debt you have relative to the total credit available to you is what matters most.
The ratio to watch is your so-called “credit utilization.” The lower that percentage is, the better it is for your credit score. Lenders prefer that you use no more than 30% of your available credit. So, if your credit line is $10,000, your balance should be $3,000 or less. But if you have $50,000 in available credit, and you owe $5,000, your credit utilization would be just 10%, which is below the 30% limit banks look for even though you have higher debt.
Tips to boost score: Reduce your balances as much as you can each month. “Paying down debt will increase your score,” says Whipple.
And take advantage of offers from your credit card company to increase your credit limit or take advantage of 0% card offers, adds Alvarez. If the bank’s willing to boost your limit from $10,000 to $15,000 and you keep your amount-owed balance to $3,000, your credit utilization will drop from 30% to 20%. A 0% card will increase your credit line and lower your interest costs. Another way to boost your credit limit is to become an “authorized” user on another person’s account in good standing, such as a parent.
Length of credit history (15% of your score)
If you’ve had the same Visa card since the mid-'90s or a Home Depot store card since 2000, make sure you keep them open. Unlike the age of a car, the older your up-to-date credit cards are, the better, according to credit-scoring rules.
Tips to boost score: Even if you don’t use a certain credit card all that much, if at all, don’t close them. And don’t let the credit card company close them due to lack of use after sending you a warning letter. You’re better off charging something small and paying it off and keeping the card open. (One caveat: if a card has a pricey annual fee, the trade-off of closing the account may be worth it.) Getting added to someone else’s card as an authorized user can also extend the length of your credit history.
Credit mix (10% of your score)
If you have a Mastercard, a Best Buy store card, a car loan and a mortgage, don’t despair. Just like a diversified portfolio of stocks is a good thing, so is successfully making on-time payments on a broad mix of different types of credit, according to FICO’s scoring system. It’s a good sign when you can juggle both revolving lines of credit like credit cards as well as installment loans like a 48-month car payment.
Tips to boost score: If you’re in a financial position to take on a new type of debt, like a Macy’s store card, or you’re shopping for your first car with interest rates at historic lows, diversifying your credit mix could make sense.
New credit (10% of your score)
If you fill out applications for four different credit cards in a short time span, lenders aren’t likely to view your sudden hunger for credit positively. It screams high-risk customer.
“Be careful about applying for new credit accounts, especially if you aren’t serious about potentially using them,” says Whipple.
When lenders review your credit history it’s considered a “hard inquiry,” which temporarily shaves points off your credit score. Lenders might also worry that having multiple cards might tempt you to overspend.
Tips to boost score: Before trying to open a new account and undergoing a hard inquiry, make sure you’re likely to get approved, so as not to waste points for an inquiry that could be rejected.
And if you’re looking to get a big loan, like a home mortgage, don’t apply for other forms of credit while the loan is pending. (The good news? When you’re shopping for a home or auto loan, multiple lender inquiries to your credit report in a specified period are treated as just one hard inquiry.)
Another way to boost your credit score is to check your report regularly and contact the credit bureaus if there are errors and get them fixed. (You’re eligible for one free credit report annually from all three credit bureaus at AnnualCreditReport.com.) You don’t want your score to be damaged by fraud or mistakes on your report.
