One of the cornerstones of excellent personal finance is building and maintaining a good credit score. Too many people do not truly understand how their credit scores are calculated and, more importantly, how they can increase their score over time. Larger credit scores open up more opportunities and also help control debt by keeping interest rates on mortgages and car loans as low as possible. Ideally, you should keep your credit score in the 800-to-850 range. This goal may seem impossible, but with diligent work and some basic understanding of how scores are calculated, you can get there in a just a few years.
The following are some key tips to help increase your credit score:
1. Focus on larger debts first.
While your instincts might tell you to knock out smaller debts first before you tackle the larger ones, the largest revolving debts (often on credit cards) have the greatest negative impact on your credit score. When you have multiple credit cards, you should give priority to accounts with the highest balances and the lowest limits. By making the largest payments possible on these accounts, you improve your debt-to-credit ratio, which is one of the biggest factors in determining your credit score. The ideal balance to carry on a credit card is between 10 and 30 percent of the credit limit.
2. Look into unreported accounts.
FICO considers rent, utility, and phone payments as alternative data, which means that these accounts do not factor into a credit score. Last year, the company launched a program that allowed credit card issuers to make a credit judgment based on these factors for people who do not have enough credit established through traditional avenues. If you want to increase your credit score, you can contact utility or phone companies and ask them to report your payment history. A long history of on-time payments can provide a significant boost. You can also ask landlords to report rent payments.
3. Maximize credit history.
Another major factor in determining your credit score is your credit history, meaning the length of time that you have maintained accounts. You may know that opening a new account can have a slight negative effect on your credit score, but you might not understand why. Accounts with a longer history build a stronger score. A very new account hurts a score because it has basically no history. To keep credit scores above 800, you need to be discriminating about new accounts and open them only when absolutely necessary. Opening several new accounts at once can severely harm your credit score.
Similarly, you shouldn’t let old accounts stay dormant because the credit company that issued them might decide close your account, which reduces your credit history. To keep old accounts open and working to improve your credit score, you should charge something every few months and then pay it off in full when the statement arrives. You don’t need to carry balances to keep accounts open.
4. Talk to creditors.
Credit is always open to negotiation, and most creditors would rather work out a mutually beneficial arrangement than have debtors default on the money they owe. If you foresee financial hardship, you can make arrangements with your creditors for new payment terms so that you can avoid making late payments or having defaults appear on your credit history. When these items do appear, you can often strike deals with the companies to have them remove the information after a string of on-time payments. Consumer law website Nolo provides some excellent guides on how to approach such situations and what rights consumers can call upon when talking to credit companies.
Another way of improving your score is simply to ask your creditor for more credit. If you rack up a lot of debt on a credit card, you can improve your credit score by lowering the debt-to-credit ratio. Often, increasing credit takes only a quick phone call, provided that you have made consistent on-time payments.
5. Keep an eye on credit reports.
Credit bureaus don’t always receive accurate information. You need to look at your credit reports regularly for any sources of error, especially if your score comes back lower than expected. These errors typically do not take a lot of work to fix provided that you catch them in a timely manner.
Some errors to keep an eye out for include incorrect payments, collections accounts, and charge-offs, as well as accounts that are incorrectly reported as anything other than “pays as agreed” or “current.” Most negative items are erased from credit reports after seven years, or 10 years if they are related to bankruptcy, so you need to insure that these dings are removed in a timely manner. Also, if any accounts say “closed by credit grantor” when they were closed by mutual agreement, you need to correct this error.
Looking at a credit report also helps you keep track of the accounts in your name. Identity theft is rampant, so you need to be diligent about making sure all accounts and your own purchases are your own.