Source: Flickr user Sean MacEntee
Planning a major purchase like a new car or a home? If your credit score isn't quite up to snuff, you might be shocked to learn just how much more you'll pay in interest on your loan. According to myFico, a person with a credit score below 660 who takes out a five-year, $20,000 loan to buy a new car will pay more than $4,000 more in interest payments than an identical borrower with a credit score above 720. In order to avoid interest rate sticker shock, our top Motley Fool contributors suggest taking these credit score steps in 2015.
Leo Sun: A simple way to raise your credit score is to pay your bills on time. According to research firm Urban Institute, 35% of Americans have unpaid debt and bills which have been reported to collection agencies. Those bills -- which include credit card, education, and hospital bills -- can crush your credit rating.
An easy way to ensure that bills are always paid on time is to enroll in automatic payments whenever possible. However, always inspect statements for fraudulent charges, and ensure that your checking account is sufficiently funded to avoid overdraft fees. Meanwhile, personal finance software and online expense tracking tools can help you schedule and track monthly bills.
If you prefer paying bills the old fashioned way, set aside one or two days per month to clear all of your bills. If monthly cash flow isn't a problem, simply pay the bills as soon as you receive them. Keep track of unpaid bills with outbox and inbox trays, and mark the bills off on a calendar.
The lesson is simple -- don't be denied a car or house loan simply because you got sloppy paying your bills.
Matt Frankel: To be in the best position to boost your credit score, you need to know what it's made up of. The FICO score, which is by far the most used score by lenders, is made up of five distinct categories of information.
Leo's suggestion to pay your bills on time actually covers the biggest category -- payment history, which makes up 35% of your score.
The second largest category is "amounts owed", and this refers mainly to how much you owe on your credit cards relative to your available credit. So there are two ways to maximize this category: increase your credit limits (as Patrick suggests below), or pay down your credit cards. I'd suggest the latter, since it's the way to boost your score that is entirely in your control. After all, your credit card company can decide to increase your limit -- or not.
Most experts agree that you should keep your debt utilization under 30% of your available credit, and that between 1% and 10% is ideal. For example, if you have $10,000 in combined credit limits, you should make it a priority to get your credit card balances below $3,000. If you are already under 30%, focus on paying them down even more.
Paying down your debt to a low percentage of your available credit shows that you handle the credit you have responsibly and are unlikely to get in over your head with debt, so it's a great way to boost your credit score.
Patrick Morris: One little known way to boost your credit score is to see if you can increase the credit limit on your credit cards.
As Matt highlighted, how much an individual uses of their available credit is a key component when determining their credit score. But this isn't just how much debt is carried over month to month, but how much of the available credit is actually used each month, even if the balance is paid off entirely.
For example, consider two individuals, Frank and Sally, who spend $500 on their credit cards each month, and pay the balance off entirely at the end of the billing period. But Frank has a $1,000 credit limit, and Sally has a $5,000 limit.
Despite having identical spending and payment history characteristics, the credit agencies see Frank is using 50% of his available credit, whereas Sally is using just 10%.
But if Frank has had a solid history of paying his bill on time, all it may take is a simple phone call to his credit card company to see if he can raise his credit limit to match Sally's $5,000.
Of course, there is some danger in this method if it entices you to spend more. But if your spending patterns stay the same and your credit limit is increased, then your credit score should be boosted too.
