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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.
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. FICO, the company which created the most popular credit scoring formula, recently conducted a survey and found that 85 percent of U.S. consumers feel more secure in the rest of their lives when their credit score is healthy.
What’s the difference between a credit report and a credit score?
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. That’s more like an SAT score — a standardized measure that is used to compare applicants.
Many financial institutions allow their customers to access their FICO scores for free. Experian, one of the three major credit bureaus, provides free FICO scores to everyone. So does FICO itself, at myFICO.com.
1. Start by determining where you currently stand
Unfortunately, many Americans are not giving their credit scores and reports the care and attention they deserve. FICO says that only 38 percent of Americans check their credit score more than once per year. About one in five have never even looked at their credit reports, according to a poll by Bankrate’s sister site, CreditCards.com.
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 December 2023. Before the COVID-19 pandemic, consumers could obtain one free report per year from each credit bureau.
Sally Taylor, FICO’s vice president of scores, suggests checking your credit monthly. You should definitely check your credit 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. If you’re among them, it’s best to find out sooner rather than later — not when you’re sitting in the finance manager’s office at the car dealership hoping to drive off with a new ride.
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 the mid-700s is basically treated the same way by lenders. It’s an excellent score that makes you very likely to be approved for the best terms on financial products.
If you’re below the mid-600s, 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 650 and 750 (or thereabouts) represents an important battleground. Every 10 to 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.
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), build 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).
2. Consider alternative credit monitoring programs
That said, there are some things you can do to quickly improve your credit score (or within a month). One is to jumpstart your credit history with things you’re already doing that haven’t historically counted toward your credit score.
Experian Boost 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. Information is pulled in retroactively, so you can get many months of (hopefully) positive data added right away.
This is especially impactful if you’re new to credit. The Consumer Financial Protection Bureau reports that 45 million Americans are credit invisible, meaning they don’t even have a credit score. Young adults and immigrants are common examples, since many are new to credit (at least in the U.S.). A surprising number of senior citizens have fallen off the credit grid as well.
Millions of others have what are considered thin credit files. Lenders typically like to see at least five credit obligations on your credit reports. Alternative credit monitoring programs are an excellent way to bulk up your credit reports.
3. Try to 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, and 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 make $4,000 in 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. In a 2020 poll, we found that 70 percent of cardholders who asked for a higher limit were successful.
The bottom line
In 2023, 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. Getting on someone else’s credit card account as an authorized user can help, too. 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.