We all want a great credit score. It can open up so many opportunities. You need credit to take out a car loan, buy your first home, and go back to school. The problem is, many of us don’t know how to get that coveted score. Sure, we know some things, like you should pay your bills and not declare bankruptcy if you can help it. But many don’t know the basic parts that make up a credit score, or which are most important. If you want a crash course in improving your score, keep reading.
1. Pay your bills on time
The most important thing you can do to improve your credit score is to pay your bills on time. This component makes up about 35% of your credit score. Now, of course we would all love to pay our bills on time, so if you haven’t been keeping up with them, it’s probably not for lack of trying. We all have our reasons why we don’t pay on time. You may have gotten your hours cut at work and simply can’t afford to pay them, or it may be that you just forget.
If your problem is forgetting, there are things you can do to avoid late fees and dings to your credit score. Many of us already use online bill pay for mortgage payments and other bills. Why not just set up an automatic payment for your credit card? You can make it the minimum payment, or you can choose a higher amount. Don’t be too afraid of overpaying. Your credit card company will either apply the extra money to your account or send it back to you as a check. This might not be ideal, since you have to wait to access your own money, but it’s not the end of the world if it happens.
If your problem isn’t forgetting, but not having enough money at the end of the month, the solution is a little bit more difficult. The first thing to try, if you haven’t already, is a budget. If you’re not currently on a budget, you need to be. You can find plenty of worksheets that help you plan it out, and you can use programs like www.Mint.com (it’s free!) to track your progress. You’ll be amazed at how much further your money goes when you watch it and stop yourself from making impulsive decisions.
2. Pay down credit card balances
After paying your bills on time, the biggest thing you can do to raise your credit score is to keep your credit balances low. Your debt-to-available-credit makes up about 30% of your credit score. A good rule of thumb is to keep your balances below one third of the credit limit.
One trick to getting your credit score to go up without paying down your balance is to ask for a credit limit increase. If your bank agress, your credit score should rise a few points. Unfortunately, this works the other way around, too. If your credit card issuer lowers you limit, your credit score will take a hit.
3. Use your cards
This one is fairly obvious. In order for the scorers to know that you’re good with credit, you have to actually use your credit. This doesn’t mean that the more you use your card the better, and that you should buy a bunch of stuff to raise your credit score. What you can do, however, is to use your credit card to pay for a couple of things, like gas or groceries. Pay it off when you get the bill, and you’re good to go.
If you’re like most Americans, you probably use a credit card from time to time. But do you use all of the ones you have? A good way to make sure a credit card account doesn’t go inactive would be to set up an automatic monthly payment for something like a car payment. Then you can set up an automatic payment to pay off your balance and voila! Your credit card is using itself.
4. Keep old credit card accounts open
One thing that many people don’t know to do is to keep their older credit cards open. This isn’t a way to improve your score as much as it is a way to keep it from going down, but it’s still important to know. About 10% of your credit score is based on credit history. That’s why people who just started using credit won’t have a perfect score even if they haven’t done anything wrong.
Closing an old credit card that you don’t use anymore may seem like a good thing to do, but your credit score will likely drop when you do. If there’s an annual fee, you can go ahead and let it go, but otherwise you can help keep your score up by leaving that account open. Use your card every once in a while just to keep it active, otherwise your bank might close it for you.
5. Don’t apply for too much new credit at one time
When you apply for a bunch of new credit, you seem desperate. Banks don’t want to lend money when you’re desperate, since it’s a sign that you can’t afford to pay them back. If you want to keep your credit score from tanking, space out your applications.
One exception to this rule is when you shop around for an interest rate. If you have several similar credit pulls (this is what it’s called when someone checks your credit score) on your report, FICO will group them together as one and your credit score won’t move much. Keep your credit pulls confined to a 14-day period and you can shop around as much as you want for that low rate.
Once you start putting all these tips into practice, your credit score will begin to go up. It won’t happen immediately, and in the meantime it can fluctuate a little, but if you’re patient it will begin to rise. Once it does go up, if you stick with the good habits you’ve learned, you’ll be able to land good rates and achieve your financial goals.