Improve Your Credit Score to Save Money
The importance of having a good credit score is a message you hear repeatedly. Banks hammer it home at their websites and in their apps. Companies that offer credit monitoring or free-credit reports advertise heavily. There was even a Super Bowl commercial this year that was about needing to improve your credit if you want to qualify for a mortgage.
It is true that creditors use your credit score to decide whether to offer you a car loan, a credit card, mortgage, or personal loan. Your credit score is also key to your ability to rent an apartment, the costs you pay for insurance, and your ability to get or keep a security clearance.
The biggest and most common reason to improve your credit score is that an excellent credit score allows you to borrow money at the lowest costs available. Improving your score so you get the best rates is an important part of building good financial health.
Different Strokes for Different Folks
To improve your credit score, it’s important you take the right steps. Not everyone needs to take the same steps. What you should do to improve your credit score depends on your current credit score and your credit history.
For example, if you have a limited credit history, or no credit history at all, you would go about improving your credit score in a different way than if you have an established credit history. Similarly, if your current credit score is a poor score, you will take different steps than if your credit score is already strong but you want it be even higher.
Don't just focus on what your score is. Pay attention to the direction it is heading and what is causing it to move. For example you and your twin can both have 700 FICO scores. However, yours may have been 760 a month ago and you let one bill go 30 days late. Your twin’s score was 660 two months ago, but is heading up as she pays down her credit balances. How the two of you will go about improving your score and how long it will take it to improve will vary.
Credit Score vs. Credit History
Your credit history is the information on your credit report that is analyzed to make your score. The key factors that make up your score are:
- Payment history
- Length of time you’ve had credit
- Credit utilization
- Variety of credit accounts
- Number of recent applications
Your credit score is a number assigned by the Credit Reporting Agencies (CRAs), more commonly called the Credit Bureaus. The three main credit bureaus are Experian, Equifax, and Trans-Union.
Your credit score is a number assigned by the credit bureaus. The FICO scoring system uses a formula that analyzes the information on your credit report to calculate your score. Your credit score is a individual number, but when creditors look at it, they put it in a bucket that covers a range of scores.
Here is one way of grouping credit score ranges:
- Excellent - 750 and above
- Very Good- 700-749
- Good 650-699
- Fair 550-649
- Poor 549 and below
A good goal to have when working to improve your credit score is to move up one group in the credit score ranges.
7 Basic Tips to Improve Your Credit Score + 1 Special Tip
The following are some basic practices that you should follow if you have any active accounts, no matter your credit score. Some tips are positive steps to take and others are steps to avoid, so you don't prevent yourself from building a stronger credit score.
The first tip is a special tip. This is the step that can raise your score the fastest:
- Control your credit utilization- Reducing your credit utilization is the biggest change most people can make to improve their credit scores quickly. Credit utilization is the second heaviest factor when determining your score, accounting for 30% of your credit score, but it is the one item you can adjust quickly and see a rapid rise in your score, if you approach it strategically.Credit utilization is a ratio that measures how much of any revolving account’s maximum credit limit that you use. For example, if you have a balance of $500 and the credit limit is $2,000, you are using 1/4th of your available credit on the account and have a credit utilization of 25%.
If improving your credit score is a primary goal, the timing of your payments is crucial to lowering your credit utilization. Your account balance that appears on your credit card statement is reported to the credit bureaus and used to calculate your credit utilization. Pay your bill in full by the due date and you will pay $0 interest charges, but you can harm your credit score even when you pay your bill down to $0 each month. If you have a $3,000 credit limit, charge $1,000 and pay it off right before it’s due, you will have a 33% credit utilization. To boost your score, pay your bill to $0 before the statement closes! The creditor will report a $0 balance and your credit utilization for that card will be 0%.
- No late payments - Pay your bills on time. Your payment history counts for 35% of your FICO score. Being one day late on your payment doesn't harm your credit score. Neither does being 29-days late. You have to be 30-days late for it to ding your score. One day late can inflict financial harm through a late-fee and a hike in your interest rate but that information never hits your credit report or your score. Use an online bill pay service through your bank or use some app that helps you manage your payments, in order to avoid any late payments.
Right your ship as quickly as you can. If you fall behind 30-days, work hard to get caught up. Your score is going to take a further hit if you go 60-days late. It also is harmed if you stay behind 30-days month after month, but that is better than falling further behind. Catching up will stop the bleeding and allow you to take steps to start improving your score.
A derogatory account harms your credit score, but as the account gets older it has less impact on your score. Also, derogatory accounts should fall off your credit report within 7.5 years of your first delinquency by federal law the Fair Credit Reporting Act. File a dispute If you have an account still showing after 7.5 years from first default.
- Older is better - The length of positive credit history counts for about 15% of your score. The longer you maintain accounts in good standing, the better your score. Solid long-term history demonstrates that you are able to make commitments to creditors and pay them as agreed.
Closing accounts in good standing doesn’t harm your credit history, as those accounts remain on the report for 10 years. However, closing an account can harm your credit utilization, as you will no longer have the credit limit for the closed accounts added to your overall credit limit. Closing the card may be wise if you pay an annual fee. If you keep the account active, then charges an annual fee, use them occasionally and pay them in full before the statement closes, to improve your score.
- Pay attention to your mix of accounts - The variety of credit accounts counts for approximately 10% of your score. It is best to have several different types of credit, such as credit cards, an unsecured personal loans, and student loans, as well as secured debt, (an auto or moretgage loan). A variety of accounts will have a positive influence on your credit score. Having too much of one type of credit, such as only credit cards, can have a negative impact.
If you have brought down your credit utilization, have only credit cards, and need to improve your score to get better rates, consider a small unsecured personal loan. It will take 3-6 months to see a boost.
- Shop for credit wisely - Shopping around is the smartest way to find the best combo of rates and fees for a home, auto loan, or student loan. However, each inquiry you make when applying for any of these loans account is reported to the credit bureaus and appears on your report. Fortunately, separate inquiries made for the same product are typically counted against your score only once, as long as they are made within a short window. The length of the window you're given to shop around depends on the scoring model, but it usually runs from 14 to 45 days. To be safe, comparison shop aggressively, but do it within a two week window.
- Don't apply for a large number of accounts at once - The number of new credit applications you've completed recently accounts for about 10% of your score. Applying for too much new credit in a short time-frame indicates that you could be credit risk, trying to use credit to keep your head above water.
- Review your credit report regularly- Inaccurate information can harm your credit score. Removing inaccurate derogatory information can boost your score in about 60 days. Because errors on credit reports are common, it is in your interest to review your credit report on a recurring basis. Use AnnualCreditReport.com to get one free report from each of the three main credit bureaus every 12 months. If you stagger your free requests, you can get a freebie from one of the bureaus every four months. Any time you see inaccurate information, take the proper steps to dispute it and have it removed.
Your employment history and the addresses at which you’ve lived are listed on your credit report, but they don’t affect your score. It is still important to review their accuracy and have inaccurate information removed. One reason is that some websites may verify your identity by accessing your credit report and asking you to verify the information on the report. If you want a PIN number from the IRS, to protect against someone filing taxes in your name, the IRS site verifies your identity with credit report questions. The credit bureaus do, too, for certain uses on their sites. If your report contains an address at which you’ve never lived, you’re asked about that address, and answer honestly that you have never lived there, you will be denied access.
- Pay attention to bills that don't appear on your report - Forget to pay your cellphone bill, a parking ticket or some other debt that doesn’t normally report to the credit bureaus and your credit score can suffer. Even though your monthly payment activity for a cellphone or utility is not reported to the credit bureaus, if your account goes delinquent and your debt remains unpaid for a long enough period of time, it will be sent to a collection agency. If the collection agency reports the debt to the credit bureaus, it will significantly harm your score. Don’t let the hard work you take to improve your score get wiped out by overlooking a debt that doesn’t report to the bureaus.
Collection agents can try to “re-age” an old account,showing the date on the account when they first took it over, but it is the date of first default that governs whether it can legally still be reported. File a dispute with any credit bureau that shows a re-aged account.
Starting from Scratch
If you have either a limited credit history or no credit history, you need to establish some credit in order to build a score. It can be hard to get credit when you have no record. It is frustrating to be told that your lack of credit history is why you are turned down. There are ways, however that you can start the process with no credit history. These steps also work if you have only a negative credit history.
- Apply for a secured credit card.
- Seek a credit-builder loan from a credit union or bank
- Find someone willing to co-sign. This helps you establish credit but poses substantial risks to the co-signer.
- Get out of debt. If you are overwhelmed with debt, you probably have to address that problem first. Reivew your debt relief options and put a plan in place to pay off your debt, before you start working on improving the credit. Loo
Buy a Home with Excellent Credit
Wherever you are today, aim to get into the excellent credit range. You can do this within two years, no matter what their current credit score and credit history are. If you already have good credit, you can do it in a year.
Excellent credit will get you the best rates on all credit products, if you meet the other qualifying criteria. You will save a lot of money when you borrow with excellent credit, and the bigger the purchase, the greater the savings.
A home purhcase is the biggest debt most people take on. It takes time to save up for a down-payment and is not the kind of purchase that is done on the spur of the moment. Because it is a purchase that takes financial planning, be sure you pay attention to your credit score well in advance of any home purchase plans and take the right steps to improve your score.