Your credit score has a huge impact on your ability to fully participate in some major life events, like purchasing a car, getting a personal loan, buying a home, even obtaining a job. Knowing your credit score, and the necessary steps to improve it, will help position you well to obtain the best interest rates when the time comes to get approved for a loan.
Although it may take some time, especially if you’re starting out with a lower than desired number, taking steps to improve your credit is always a worthwhile endeavor. Even if you just want to get from 700 to 800, there are some key things you can do over time to make the climb. Here are 5 important factors to keep in mind for improving your credit score:
Know Your Credit Report
The best way to know what your credit profile looks like is to simply obtain a copy of the credit report. You may be surprised by what you see. You should never assume that your credit report will be one hundred percent accurate. Mistakes and inaccuracies often occur, even with those individuals who have stellar credit. If you find mistakes, you’ll need to start the process to report them and have them corrected.
Besides looking for discrepancies in your credit, you’ll benefit from knowing the specific reasons your credit score is the number it is. Knowing your biggest areas of weakness will tell you exactly where you need to improve. For instance, if you have a high debt-to-credit ratio, then you know the quickest way to start seeing an improvement in your score is by paying off some of that debt.
An easy way to obtain your report is by going to the Annual Credit Report website, an authorized online source, for a free credit report. Under federal law, you can get a free report from each of the three national credit reporting companies every 12 months.
You can also call 877-322-8228 to obtain a copy. Or, you can fill out the Federal Trade Commission’s (FTC) Annual Credit Report Request form at their website. This form can be mailed to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.
Examine the Timeliness of Your Payments
This factor accounts for approximately 35% of your credit score. That’s huge! Everytime you are delinquent on a credit card payment, it hurts this section of your score. Every time you have been referred to a collection agency, even by mistake, this section is affected. And, if you have ever had a foreclosure or bankruptcy, it will hurt this section of your credit report as well. The biggest favor you can do to your credit score is practicing excellent organizational skills and timely bill pay management. Otherwise, it’s easy to accidentally miss a payment or two, especially if you carry more than a few lines of credit.
Limit Outstanding Debt
30% of your score is determined by the total amount of debt owed, compared to the amount of credit available to you. The best way to keep this ratio low is by having a decent number of credit lines – all with very low balances. Use cards to spend on the things you need, and pay them off monthly. This way your debt-to-credit ratio remains low and you can still rack up rewards points and discounts from using your cards.
Take Measures to Lengthen Your Credit History
Although not as big of a factor as outstanding debt and payment timeliness, credit history still counts for 15% of your overall score. The longer a credit line has been open in your name, the higher your credit score will be. This is where opening new credit might hurt a little bit. If you open new lines of credit often, then your overall credit history length may be shortened.
Closing credit cards may not necessarily be the best idea either. It may shorten your history, depending on the scoring mechanism. FICO scores actually count both open and closed cards when determining your history. Closing accounts also lowers your debt-to-credit ratio, which is not generally a good move when you’re trying to improve your score.
Be Careful When Acquiring New Credit
Before you hit that apply button, think about if it’s something you really want to do. Each new inquiry or application for credit may lower your score up to five points. So before you open a new line of credit, take the time to research the card so that you can be sure this is a card with the lowest rate and the best personal benefits.
For more information on how credit scores are derived, and to learn more about what you can do on an individual basis to improve your own score, take a look at the Federal Trade Commission’s resources. They have a few publications that may be really helpful. One titled “Building A Better Credit Report” contains instructions on how to correct mistakes with your report, and recommendations for avoiding rip offs and scams. Another one called “Credit Repair: Self-Help May Be Best” will help you improve your credit and also provides a list of free or no cost resources to help you repair your credit.
Improving your credit score is a worthwhile process, whether you’re just trying to nudge it up fifty points or 350 points. It may take only a few months or it may take several years. But the better your credit, the more opportunity you’ll enjoy – personally, professionally, and financially.
There is also a certain sense of pride you’ll feel knowing that every lender would love to hand you a line of credit because of your high score. Maintaining excellent credit forces those who aren’t naturally financially organized to be that way anyway. It is a key to financial freedom, and a large deterrent to racking up debt — something that in this day and age is all too easy to do.