Do You know what is considered a good credit score?
Your credit score is used by lenders to determine whether or not they want to risk lending you money. It’s also used by some employers when they’re deciding who to hire; landlords who are looking for tenants; and even the calculation of your car insurance premiums. Because your credit score is so important to your financial well being, you should try to improve your credit score to receive the best interest rates when you borrow money, improve your chances of getting hired and keep your car insurance premiums as low as possible.
How to Improve Your Credit Score
Credit scores are calculated using a number of factors including your payment history, amount owed, types of credit you have, and length of time of your credit history. Here is a graphical representation of how your credit score is determined:
There are no quick fixes to improving a low credit score, but the following tips will help you raise your score over time:
Obviously, the best way to improve or keep a good credit score is to pay all of your bills on time, all the time. Each time you make a payment late or enter into collections, your FICO score is impacted negatively and the result is a lower score than you’d like.
If you already have accounts that are late, get them paid on time and try to keep them current. The more months in a row you can pay all of your bills on time, the higher your credit score will be.
If you have an account in collections, paying it off will not remove it from your credit report. Collection accounts and bankruptcy data stay on your credit report, and impact your credit score for seven years.
Amount of Money You Owe
The rule of thumb is to keep your balances within 30% of your credit limit. If you have credit cards that you owe as much as you’re allowed to borrow, it impacts your score negatively. If you have cards with balances that are almost as much as your credit limit or higher, focus on paying that debt down first.
Don’t close credit card accounts that are paid off or not being used because it reduces the amount of your available credit. When you have less credit available, the amount of debt you have compared to the amount available increases, and lowers your credit score. On the flip side, it’s not a good idea to go out and open a ton of new credit cards to increase your available credit, either.
Length of Credit History
How long you have been managing credit also plays a role in the calculation of your credit score. The more new credit accounts you have, the lower your average account age is, which will affect your score more than if you have several older credit accounts. Opening several new credit accounts in a short period of time will lower your score, because it signals you are higher risk than someone who hasn’t needed to borrow money.
If you need to apply for credit, like for a car loan, apply to multiple places within a few days time. The FICO score can distinguish between searching for several different types of credit lines compared to searching for the best rate on a single loan.
Types of Credit
Having a good mix of credit types is ideal, but opening new types of credit just to improve your variety of credit types probably won’t result in a higher credit score. It’s just that someone who has a mortgage, a credit card and a car loan would look less risky than someone who had 4 credit card accounts on their credit report. Having no credit at all is seen as risky when you decide to try and borrow money, because the lender has no way of knowing whether you can make your payments on time or not.
How to check your credit score for free
You can monitor your credit score to see if it is improving. The federal government mandates the Credit Bureaus give you a free copy of your credit report once per year, but they do not require them to offer you a free copy of your credit score (see difference between credit report and credit score). Here is how to get your Free FICO Credit Score. You may have to sign up for a free trial, which you can cancel before you are charged any money.
Using Credit Cards to Build Credit History and Your Credit Score
My first experience building credit was with a credit card that I opened while I was attending college. Thankfully, I avoided the classic college mistake of maxing out the card in the first month of ownership, then living with debt for the next 10 years. My goal was to apply for the credit card, make a several hundred dollar purchase, then pay off the loan over a couple months to prove I was capable of making regular payments. I paid a few dollars in interest charges over the time I made those payments, but in my opinion, a few dollars in finance charges was well worth building my credit history and credit score.
It has been well over ten years since I opened my first credit card and I haven’t made a finance charge on a credit card since then. That experience and several other successful loans since then have helped me build a high credit score and a favorable credit history.
Will Opening a Credit Card Impact Your Credit Score?
Credit cards aren’t the only way to establish your credit history, but they are usually the easiest way to create a credit history because it is usually easier to open a credit card than other forms of credit such as a car loan or mortgage (lenders are less likely to lend that much money to someone who doesn’t have any credit history).
Once you have established a line of credit, your actions are reported to the credit bureaus which begin recording your credit history on your credit report. Over time, your actions will be used to determine your credit score. Here is more information about the difference between credit report and credit score.
No credit or poor credit? If you are having trouble getting approved for a credit card, then you should check out secured credit cards, which require a deposit and sometimes come with an annual fee. The deposit works as collateral for your charges and if you don’t make on time payments, the bank will use your deposit to pay your charges. Secured credit cards cost a little more than traditional credit cards, but they often come with guaranteed approval and with proper use will help you improve your credit score. After proving your ability to make payments, you can often upgrade your secured credit card to a non-secured card that has a better interest rate and doesn’t come with annual fees.
Important Notes About Building Credit with a Credit Card
Getting a credit card can help you build your credit so long as you treat it responsibly – otherwise you are only going to hurt your credit score. Credit cards can be a trap for some people, so it’s best to make sure you only make charges you can and will pay in full each month. Otherwise you may find yourself getting into a cycle of debt that is difficult to escape from.
Tips to establish your credit and increase your credit score:
- Understand how your credit score works.
- Only charge what you can pay with cash.
- Pay your full credit card bill each month.
- Repeat the process.
- Add time.
What is a good credit score range? The key to establishing a good credit history and good credit score is being able to prove that you are responsible and can continually pay loans that you receive. There is no silver bullet to improving your score quickly; it takes time and commitment.