Whether you are looking to obtain a new credit card, purchase a new car, or buy your first home, the one constant in all three is that you will have to face the ever-powerful 3-digit number – your FICO score. According to myfico.com, the FICO Score is a number that summarizes your credit risk to lenders. Lenders use it to make credit decisions, such as the interest rate you get when you apply for a loan. The higher your credit score, the less risk you are to the lenders.
This is an overwhelming concept to most people, especially if you find yourself with a low credit score. However, with a few simple tips, and a little time, you can find yourself on the road to recovery.
Getting Started on Your Path to a Better (Good) Credit Score
Begin by checking your credit report for any errors. You are eligible to obtain one free credit report annually from each of these three national credit bureaus: TransUnion, Equifax and Experian. These companies record most, if not all, of your credit history. Review your report for any incorrect late payment dates or outstanding debts. If you find mistakes, be sure to dispute them immediately, as this is the simplest way to boost your credit score.
What Are My Next Steps?
Once you have fixed any errors on your credit report, the rest is simply about managing your accounts and monies responsibly. Achieving this goal seems like a simple task on the surface, but exactly how you manage your various accounts can have a powerful impact on your credit score. Regardless of your financial situation, here’s a look at five helpful tools to achieve your goals.
Utilize Only the Credit You Need
To start, only use credit when it is absolutely necessary. Many of us receive credit card offers with zero or low percentage interest rates, and it can be very tempting to open up new accounts and transfer previous balances to the new card. Resist this trap. Not only do new accounts lower your average account age, which is a major factor in credit scoring, but you open yourself up to a higher level of credit available to you. This increases your potential risk in the eyes of creditors. Additionally, opening too many new accounts can be looked at as suspicious to a lender considering you for a loan.
Keep Your Debt as Low as Possible
The less credit that you actually use, the better your rating will be. Ideally, you should maintain a rate of credit debt at less than 10% of your credit limit. Take a look at your revolving credit account balances as well as interest rates. Attempt to spread your risk as much as possible and devise a pay-off plan. Devote as many funds as possible to the account with the highest interest rate, while still maintaining a good standing with the others. Focus on this pay-off and then move on to the next revolving account.
Pay Your Bills on Time
While this may seem like a logical idea, it may not always be easy to do. Do your best to avoid late payments, even on the bills you do not think will affect your credit. Being late on your utility bill can impact your credit score much like a late credit card payment. Many banks offer payment reminder options, such as an email or text; set yourself up with as many of these as possible. Most companies today offer (and prefer) an automatic debit option. If this is feasible for you, take advantage of this opportunity. If you do ever find yourself behind on payments, contact the company directly to avoid those nasty bill collectors. The companies will often work with you, as it is in their best interest to retain customers.
Increase your credit limits
Good credit card holders can raise their rating by obtaining additional credit. Request a credit line increase, particularly if your overall use is high. Doing so on accounts in good standing will only improve your credit utilization ratio, hopefully reaching that 10 percent of your credit rate rule we mentioned earlier.
Keep Cards and Other Revolving Accounts Active
It is a common misconception that closing a paid-off account will increase your credit score. Doing so, however, can actually have the opposite effect. Credit history age accounts for 15 percent of your credit score. Older accounts show that you have been maintaining credit for a longer period of time. Closing those accounts, therefore, will negatively impact your overall credit scoring. Continue to diligently monitor those open accounts to ensure no fraudulent activity occurs, but maintain those accounts.
The Power is in Your Hands
Obtaining and maintaining a high FICO credit rating can feel like a daunting task. But the good news is, you hold all the power. These five tips will arm you with the tools you need for future credit success. Through patience and diligence, you can take control of what once seemed like an impossible task.