Why is your credit score so important? Your credit scores determine a lot more than the loans you can get and the interest rates you pay. Insurers use credit scores to set premiums for auto and homeowners coverage. Landlords use them to decide who gets to rent their apartments. Credit scores determine who gets the best cell phone plans and who has to make bigger deposits to get utilities. Credit scores are a financial tool, in other words, but whether or not they work for you or against you depends on how good they are.
But do you even know what a credit score is? Your credit score is a three-digit number that relates to how likely you are to repay debt. Banks and lenders use it to decide whether they’ll approve you for a credit card or loan. The higher your credit score the better. The three main credit bureaus – Equifax, Experian and TransUnion – create your credit reports and come up with a score that ranges from 300-850. Your scores are typically based on things like how often you make payments on time and how many accounts you have in good standing.
So whether you are starting as a financial “ghost” (no credit), you have bad credit, or you have fair credit, the good news is that it can only go up from here. So I have created a couple tips on how you can bring your credit score from an “Oh please help me!” to an “Oh my god! I’m the sh*t!” So here we go:
Pay Your Bills On Time:
One of the things that affects your credit score the most is paying your bills and paying them on time. If you are not currently paying your bills and on time, then why would any lender lend you money? This makes you look like a liability. Past payment performance is usually considered a good predictor of future performance.
If you do not already pay your bills, and on time, then get in the habit. Make a budget so that you know that you have income allocated to paying your bills. You never want to carry over a balance on your credit cards to the next month so that you can avoid paying interest. Then set your payments to be automatically paid each month, this way you can never miss a payment.
Pay Off Debt:
Debt is another big factor considered when calculating your credit score. If you already owe massive amounts of debt that you have yet to pay back, then why should a lender give you even more that you probably won’t pay back either? The answer is… they won’t!
If you have gotten yourself into debt, no matter how big or small, then you can get yourself out of it. Look at your budget, make sure that you allocate enough money to your debts to pay at least the minimum payment. See what extra income you can allocate towards your debt with the highest interest rate, then throw all of your extra cash towards that debt. Once that debt is paid off, then tackle the debt with the next highest interest rate, and so on, until your debt is cleared (if you need help with debt read the debt blog, link at the bottom of the page). This will take a lot of hard work and sacrifice, but it will totally be worth it. You could even consider transferring the balance on your card with the highest interest rate to a new card with a lower interest rate and a 0% annual percentage yield (interest) for the first year. You will be amazed how much just paying off your debts can improve your credit score.
Keep Your Credit Utilization Below 30%
The credit utilization ratio is another important number in credit score calculations. Your utilization is essentially how much of your available credit you use. So if you have $10,000 in available credit and you use $3,000 or it, then your utilization ratio is 30%.
So basically, lenders like to see a credit utilization rate of 30% or lower. People with the best credit score have the lowest utilization rate. Keeping your utilization low shows that you know how to manage your money responsibly.
Apply For And Open New Credit Accounts Only As Needed
Don’t open up new credit accounts just to have more credit. Unnecessary credit can harm your credit in multiple ways. From creating too many hard inquiries on your credit report to tempting you to overspend and accumulate debt. Opening a new credit card can increase your overall credit limit but the act of applying for credit creates a hard inquiry on your credit report. Too many hard inquiries on your credit report can negatively impact your score, and hard inquiries can stay on our report for up to two years.
If you do want to apply for a new credit account, then do so responsibly. There is no magic number of how many credit cards you should have, although having one or two is a good idea if you are trying to build credit. Generally, how you use these cards is much more important than how many of them you have. A new credit account could help boost your score because it increases the amount of your available credit, which can lower your utilization rate. If you are using multiple cards responsibly and paying off the full monthly balance on time on each card, your also adding positive information to your payment history. Be careful though, if you tend to overspend you could end up with a lot of debt if you have access to multiple credit lines. With multiple lines of credit it could also be more difficult to keep track of your cards and make a late payment by mistake. So always make sure that you are keeping up with each of your cards and paying off your full monthly balance on time. I suggest looking into automated payments to make sure that they always get paid and paid on time.
Side Note: If you have applied for cards and are having issues getting approved then you can apply for an approved credit card. A secured card is a credit card designed for someone with bad credit or a thin credit file. It requires a refundable deposit in exchange for a credit limit, usually the deposit will be the same as the cards limit. Most credit cards are unsecured credit cards, which means a security deposit isn't required. They help build credit in much the same way as unsecured cards do.
Another way to boost your credit score through credit cards if you are having issues getting approved (or even if you already have a credit card, really anyone can do this to boost their score) is to become an authorized user on someone else’s card. So if your mom, or dad, or spouse, or whoever you are close to that has a good credit score and is responsible with their credit card would agree to add you as an authorized user to their credit card then that is a sure fire way to boost your credit score for two reasons. Reason number one is that your available credit will go up, since the credit line on the card your added to will also become your available credit, so your utilization rate will go down. Reason number two is that the person who added you as an authorized user will continue to make payments to this card and on time so positive information is being added to your payment history.
Do Not Close Unused Credit Cards
I know this doesn’t make any sense. If you do not use a card anymore, and no longer have need of it then why should you be penalized for closing it? Although I don’t like this logic because it can be used to keep us in perpetual debt, closing an unused credit card can potentially lower your credit score for two reasons.
The first reason is that your over all available credit limit is lowered. So if you had $10,000 in available credit and you utilized $3,000 of it and then you closed an account with an available credit of $3,000, you would have increased your utilization rate from 30% to almost 43%. The other reason closing an unused credit card can negatively affect your credit score is by shortening your longest line of credit. If the card you plan on closing is your oldest card, then you might want to reconsider closing it and shortening your credit history.
Check Your Credit Score
This one is so important. Many people think they have bad credit or good credit, but have no clue what their actual credit score is. If you do not check you score then how can you know where you stand and what you need to improve upon? You can’t! So it is vital to check your credit score.
You can view your credit score and report for free on Credit Karma at any time. Since your credit scores are based on the data in your credit reports from the three credit bureaus, Transunion, Equifax, and Experion, it is incredibly important to make sure that all of that information is accurate. If you have any inaccuracies on your credit report, your credit score will reflect that inaccuracy, whether it be clerical or fraudulent. If you see errors, dispute the information and get it corrected right away. Another reason checking your credit score is good is because knowing your score can keep you on track. If your score is improving then you know you are doing something right. If your score is still declining then you have more work to do.
Building your credit score takes time. There is no quick fix. Delinquencies and most public record items remain on your credit report for seven years, some bankruptcies may remain for ten years, and inquiries can remain on your report for up to two years. It is up tp you to be responsible with your credit. Get out of debt. Pay your bills and pay them on time. Keep your credit utilization below 30%. Only apply for as much credit as you need and manage it responsibly. It is up to you to make sure that your credit is working for you and not against you. Put in the work so that you can reach financial freedom!