3 Practical Steps to Improving Your Credit Score
/There are many reasons your credit score matters, but one of the big reasons is getting a better interest rate on a loan or mortgage. The lower your interest rate, the less you’ll pay monthly (or more you’ll be able to afford).
To better understand how to improve your FICO scores, it is important to understand how they are calculated.
Payment history accounts for 35%
Total outstanding debt versus your credit limits accounts for 30%
Length of credit history accounts for 15%
Credit inquiries and number of new accounts is 10%
Types of credit used accounts for 10%
Most credit scores range from 300-850 and are typically categorized:
Excellent Credit: 750+
Good Credit: 700-749
Fair Credit: 650-699
Poor Credit: 600-649
Bad Credit: below 600
Pull Your Credit Report - Check for Accuracy
Before you can really hone in on a proper credit repair strategy, you’ll need to know exactly what you’re working with. You’ll want to pull a report from each of the 3 major credit bureaus: Equifax, Experian, and TransUnion.
If you don’t already know, you are entitled to a free credit report annually, available from sites such as annualcreditreport.com.
After pulling your reports, review them all thoroughly. First, check all of your personal information; your name, address, date of birth, etc. Next, be sure all of your creditors are being reported and that there are no inaccurate reports, such as a false late payment. Keep in mind that while you may have an error on one, you may not on the others, so it is important to review all three reports in detail. Should you find an error, you will need to contact each bureau to address each specific issue, if there are any.
2. Make More Than the Minimum Payment
The first active step will be the most obvious choice, but the quickest impact you can have on your credit score is lowering your credit card balances. The most optimal balance for your credit card is 0, if you use it monthly and pay it off every month, but the second best is getting your balances down to less than 30% of your credit card limit. So if you have a $5,000 limit, your balance should be no more than $1,500. In addition, if you increase your credit card limit, it could also potentially IMPROVE your credit score (as long as you don’t use the new limits) as this improves your ratios.
3. Do Not Close Your Credit Cards
There are a couple of reasons why closing a credit card can affect your credit score. The first one being it will lower your availability/usage ratios overall. What I mean is if you have a total limit of $20,000 across all of your credit cards and you have a $6,000 balance in total (at the maximum usage you want at 30%), and you cancel a card with an $8,000 limit, your debt ratio now went from 30% to 50% usage which will automatically lower your score. It will take you longer to raise your credit score if you have lower available credit when you carry balances on your cards.
When you get your credit score in the “excellent” category and you still want to close a card, there are ways you can do so without causing too much damage. Again, you only want to cancel a card if you have great credit with little to no balances, otherwise you will do more harm than good. With that said, however, should you decide to close a credit card later on, it is very important not to close the card(s) you’ve had the longest. One of the ways your credit score is calculated is the age of your credit lines.
