Whether you like it or not, your credit score is something that has a big impact on your life. Respect it, and it will treat you well. But if you abuse it, your credit score could hold back and make you miss out on a lot of great opportunities.
For instance, let’s say you’re hoping to buy a new house. If you went to apply for a conventional mortgage, you’d need a minimum FICO score of at least 620 just to qualify for an offer. That means that even if you have the money saved for a down payment and earn a decent income, a low credit score can keep you from getting the things you want in life.
Luckily, your credit score doesn’t stay at one number forever. If you understand how it’s calculated and what affects it, then you can game the system. Here’s how to improve your credit score and work your way up to that iron-clad number of 850.
Check Your Report
The very first thing you should do when you’re trying to repair your credit is to make sure that it’s accurate. To do this, download a full copy of your credit report and check it over for mistakes.
You can always get a free copy from any of the three major bureaus once per year. Inside, you’ll find records of every credit card or loan you’ve ever had, their status, notices if you were ever delinquent on payments and a lot of other information that’s important to lenders.
The most important goal is to make sure that they are all in fact your accounts and that there aren’t any on the report by mistake or falsely opened under your name and info due to identity theft. If there are mistakes, you have the right to file a dispute and request that they be removed from your report.
Pay Down Your Debts
At least 30 percent of your FICO score is determined by how much debt you owe to all creditors. This is known as revolving debt, which is any money that you borrowed or financed from a lender or other institution. Your credit cards, mortgage, auto, college, and personal loans, are all revolving debt, for example.
Your goal of course should be to pay down this debt as quickly and responsibly as possible. Not only will it be good for your credit score, but it could also save you tens of thousands of dollars in interest payments over your lifetime.
A very simple strategy for paying off your debts is to use something called the debt snowball method. This is where you do the following:
- Make a list of all your debts from smallest to largest balance (and not by interest rate).
- Payoff the debt with the smallest balance first.
- Then take the money you were using for the first debt and roll it into the payments for the next smallest balance.
Over time, the more loans you pay off, the more money you add on to the next debt (like a snowball rolling down a hill). Thus, each loan should be getting paid off quicker because each time you’ll have more money to put towards it.
Make Your Payments on Time
Perhaps the biggest portion of your FICO score (35 percent) is your payment history. This isn’t just merely if you were on time or not, but also how many days it took you to make the payment, how much you actually paid back, and even major events such as declaring bankruptcy, lawsuits, etc.
One of the easiest ways to ensure that your bills will always be paid on time is to sign up for automatic payments. Almost every credit card company, lender, and service provider will have some way of letting you do this; most even encourage automatic payments since it helps them ensure they will be paid on time every month. Payments can generally be charged to a credit card or be taken directly from your checking account.
If you’re not able to make payments on time due to excessive interest, you’re encouraged to call lenders and see if you can negotiate a lower rate or lesser payment without penalty to your credit score. You may also find it helpful to speak with a credit counseling service who could guide you on how to set up a budget for your money and consolidate your debts.
Don’t Close Your Cards
Here’s something interesting: Being responsible and closing down credit cards you no longer use can actually bring your credit score down.
How’s that possible? Because going back to the fact that 30 percent of your credit score is determined by how much you owe, one key component in that equation is how much credit you have available to you. Together, these numbers combine into something called your credit utilization ratio.
Simply put, if we assume the amount of debt you have is constant, then:
- The more cards you have, the more credit you have available, and the lower your utilization ratio.
- Adversely, when you close your unused cards, you have less credit available, and therefore that makes your utilization seem higher.
If you don’t owe an annual fee on your credit card, then it actually does you less harm than good to simply keep it open. You could even throw it in your dresser draw and never use it, and it would still be helping increase your credit score.
If you think this is crazy, then meet the Guinness World Record title holder Walter Cavanagh of Santa Clara, California. “Mr. Plastic Fantastic” has 1,497 credit cards in his name amounting to a $1.7 million line of credit.
And get this: Cavanagh has a nearly perfect credit score! Out of all of those cards, he only really uses one and he pays it off every month.
Keep Your Oldest Card Open
Speaking of not closing your cards, one little trick to raising your credit score is to keep your oldest card open for as long as possible.
Why is that helpful? Because 15 percent of your FICO score is determined by the length of your active credit history. So to use this to your advantage, the longer you keep your oldest card open, the longer your history appears on your credit report.
If this seems confusing, think about it from the perspective of a lender. Let’s say you’ve been in good standing with a credit card company for the past 10 years. Doesn’t that imply that you’re probably a reputable candidate for a loan? Of course!
Once I found this tip out, I decided to keep our oldest credit card (our Discover Card) open from now until forever. Since it costs us nothing and has some pretty great revolving rewards categories, why not let it help boost my score.
Applying for too many credit cards or any loans for that matter can be a red flag on your credit score (10 percent). This is because lenders will get the impression that you’re overextending your finances and becoming a credit risk (whether you really are or not).
That’s why if you’re trying to raise your limit, avoid applying for any new loans or accounts as much as possible. Don’t go opening any new credit cards and certainly don’t let anyone pull your credit score for an inquiry that doesn’t need to.
Mix It Up with Other Types of Loans
Finally, your credit score isn’t always just about your credit cards. A good chunk of your score (10 percent) is actually determined by your overall credit mix.
In addition to revolving accounts like credit cards, having a mortgage, auto loan, or even student loans can benefit you. This is because it shows that you can responsibly make fixed payments every month too.
Overall, the best way to improve your credit score is to just be as sensible as possible. Pay your balances off every month, don’t accumulate any new debt, and maintain a reasonable mixture of loans. Start doing these steps right away, and with a little patience, you’ll surely see your FICO score improve over time.
Contributor’s opinions are their own. Always do your own due diligence before investing.
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