Your credit score is one of the most important numbers in your financial life. For instance, it’s a major factor in whether you’re approved for credit cards and other loans. If you’re approved, lenders use your credit score to determine your interest rate.
And your credit score even plays a role in other applications that don’t technically involve extending credit, such as leasing an apartment or signing up for cellphone service.
Start by determining where you currently stand
Unfortunately, many Americans are not giving their credit scores the care and attention they deserve. Just less than half of U.S. adults are “very confident” they know their credit score, according to a 2019 Bankrate survey.
For starters, I think everyone should check their credit reports at least a few times per year. You can access your Equifax, Experian and TransUnion credit reports for free at AnnualCreditReport.com. They’re available weekly through April 20, 2022. Before the COVID-19 pandemic, consumers could obtain one free report per year from each credit bureau.
Check your credit score periodically
I don’t think you need to pull your credit reports every week, but at least every three to four months is a good idea. You should also check your reports before applying for a loan or line of credit to make sure everything looks good. In a Consumer Reports study of nearly 6,000 U.S. adults, more than a third of participants found at least one error on their credit report.
Think of your credit report like your financial report card: It contains information such as your payment history, how much you owe and the various types of credit you’ve signed up for (credit cards, student loans, car loans, mortgages and so on). This raw data is distilled into a three-digit number known as your credit score.
The most popular credit scoring formula is that of the Fair Isaac Company (FICO). Many financial institutions allow their customers to access their FICO scores for free. Also, Discover and Experian provide free FICO scores to everyone.
Here’s your first 2022 credit resolution: Aim to check at least one of your credit scores and at least one of your credit reports every three months. After all, you can’t really know where you are going until you know where you have been, to quote Maya Angelou.
What is a good credit score?
If your credit score is in the mid-700s or higher, keep doing what you’re doing. Even though the FICO formula goes up to 850, anything above 740 is basically treated the same way by lenders—which is to say it’s an excellent score that makes you very likely to be approved for the best terms with financial products.
If you’re below 670 or so, you’re considered to have subprime credit. This means it will be much harder to get approved for loans and lines of credit, and if you are approved, you’ll probably pay a significantly higher interest rate.
The area between 670 and 740 represents an important battleground. Every 10-20 points that you’re able to gain will place you into a noticeably better tier, raising your approval odds and lowering the interest rates you’re paying on loans.
Steady credit improvements
In general, getting and keeping a strong credit score is more of a marathon than a sprint. First and foremost, you should aim to pay your bills on time because payment history represents 35 percent of the FICO formula.
Additionally, keep your debts low (how much you owe counts for 30 percent), maintain longevity (the length of your account history represents 15 percent), successfully manage different types of credit (your mix of accounts comprises 10 percent) and avoid applying for too much credit all at once (recent inquiries fill out the remaining 10 percent of the puzzle).
That said, there are some things you can do to improve your credit score quickly—within a month. One is to jumpstart your credit history with things you’re already doing that haven’t historically counted towards your credit score.
Experian Boost, Perch and eCredable Lift are examples of services that can bring this kind of information—for example, rent, utility, streaming and cellphone payment histories—into your credit reports. The first two are free, and eCredable Lift costs $24.95 per year. In all three cases, your information can be pulled in retroactively, so you can get many months of (hopefully) positive data added right away.
Keep your credit utilization rate low
Another tactic that can yield near-term improvement is to lower your credit utilization ratio. This mainly pertains to credit cards—it’s how much credit you’re using divided by your credit limit.
What a lot of people don’t know is that your credit usage is normally reported on your statement date. So even if you pay your credit card bills in full each month, you might still have a high credit utilization ratio that can drag down your credit score.
Let’s say you have a $5,000 credit limit, and you made $4,000 of charges throughout the month. Even if you pay in full before the due date, the fact that you’re using 80 percent of your available credit looks risky to lenders and credit scoring algorithms.
While there’s no set threshold, it’s often recommended to keep this ratio below 30 percent, and FICO says many people with the best credit scores have credit utilization ratios under 10 percent. The main point is that your credit score should benefit when you lower your credit utilization ratio, whatever it currently happens to be.
Useful tactics include making more than one credit card payment per month (I like to pay my cards off every two weeks) and asking for a higher credit limit—after all, 70 percent of cardholders who asked for a higher limit in 2020 were successful.
The bottom line
In 2022, resolve to check in on your credit reports and scores periodically. Especially if your credit score needs some work, signing up for alternative credit scoring tools could give you a nice bump. The same goes for getting on someone else’s credit card account as an authorized user. And lowering your credit utilization ratio via extra credit card payments or a higher credit limit is another effective strategy.
Credit scores can be mystifying to a lot of people. Don’t make it too complicated. In general, you just need to remember a few basic habits, such as paying your bills on time, keeping your debts low and spacing out your credit applications. If you do those things consistently, you’ll build and maintain a strong credit score.
Have a question about credit cards? E-mail me at email@example.com and I’d be happy to help.