What is a credit score, exactly? It’s a three-digit number used by lenders to determine an individual’s credit-worthiness. The numbers are determined by three credit reporting bureaus – TransUnion, Equifax, and Experian. These companies assess information in your credit report to determine your score using closely-guarded algorithms.
The only time you really need to worry about your score is when you’re planning a major purchase where you will need credit, like a car or home mortgage. Otherwise, just keeping an eye on your report is sufficient (see #1 below).
If you don’t know your number and will be making a large purchase (or are just curious), you can buy your credit score from the major credit reporting agencies at myfico.com. Anything above 700 is considered good credit; above 760 is excellent. The average credit score for Americans is 689. Having a score less than 700 may effect available credit and borrowing rates. If that’s you, use these strategies to nudge it up.
1. Check your credit report and request corrections for significant errors. You can check your credit report for free on annualcreditreport.com once a year from each bureau, so make one request from each of the three bureaus every four months. If you find major errors, fix them. Here’s the stuff that’s usually worth the effort of correcting with the bureaus:
- Negative items that aren’t yours like late payments or collections
- Credit limits reported as lower than they actually are
- Accounts listed as anything other than “current” or “paid as agreed” if you paid on time and in full
- Negative items older than seven years (10 in the case of bankruptcy) that should have automatically fallen off your reports
2. Pay your bill on time, every time. Payment history is the biggest factor in calculating your credit score, so this is important! If you tend to be forgetful about paying your bills, set up a calendar reminder or have the bill pay service through your bank notify you when a bill is due. Consistency is key.
3. Only use 20-30% of your available credit at any time. This applies to all of the credit available to you. If you have multiple credit cards and a home equity line of credit, for instance, you would total up the credit limits from each, then calculate 20-30% of that number.
4. Ask for a credit limit increase. As the economy is improving, many lenders are becoming more flexible about working with their customers on credit limits. Increasing your credit limit on your cards helps with the 20-30% ratio mentioned above. If you can’t get a credit limit increase, may multiple payments to your cards each month to keep the ratio lower.
5. Keep your lines of credit open. Even if you haven’t used a credit card in years, keeping it open can help your score. This also speaks to the 20-30% available ratio used to calculate your score. The more credit you have available to you, the lower ratio of debt to credit limit you will show. Just tuck those unused cards in a safe place.
6. Limit the number of inquiries from credit applications. Say you want to sign up for a couple of new rewards-specific credit cards to start wracking up points. Complete all of your applications in a two-day window, which will be recorded on your credit report as one inquiry. If you spread them out, the multiple inquiries on your report will likely ding your score.
7. Keep a credit card and installment loan open. You’ll see the fastest uptick in your score by showing you’re responsible with both major types of credit: revolving (credit cards) and installment (personal loans, auto, mortgages and student loans). If you don’t have an installment account, think about opening one if it makes sense for your situation.
8. Get a credit card, if you don’t have one. To establish credit for the first time, ask a parent or trusted person to add you as an authorized user on their account. This will give you credit for the entire account history, not just from the date you were added to the account. Credit history is a major factor in credit scoring, and this strategy could give you a leg up. Be aware, though, that the primary account holder (your parent) will be on the hook for your spending on the account, and you, the authorized user, will also get dinged if the primary defaults on the account.
9. Use your oldest credit card occasionally… Showing a long credit history is an important factor in your credit score. Make sure to keep your oldest card open and “active” in the eyes of the creditors by using it every once in a while. Otherwise it won’t be weighted as heavily as other cards you use more frequently.
10. …but don’t regularly keep a balance on lots of cards. Credit bureaus look at how many cards carry a balance and may ding you for having too many, even if your balances are small. Pay off all of your lowest balance cards and focus on one or two cards for regular spending.
Have other tips for improving credit scores? Share them in the comments below!