When it comes to all things financial, Americans certainly have plenty to worry about. Debt levels are climbing. Savings are lacking. And whereas retirement used to seem like a given, many of today's workers doubt whether they'll ever manage to get there at all.
But if there's one thing that tops Americans' list of financial concerns this year, it's their lackluster credit. In fact, 73% of U.S. adults say that improving their credit is the most pressing financial item on their minds, according to a newly released GOBankingRates study.
If your credit score needs work, there are several steps you can take to improve it. You just need to know where to start.
How credit scores are calculated
Before you can work on boosting your credit, you'll need to understand where that number comes from in the first place. There are five key components that go into determining a credit score, each of which carries its own amount of weight:
- Payment history (35%), which speaks to your tendency to pay your bills on time.
- Credit utilization ratio (30%), which represents the percentage of available credit you're using at once.
- Length of credit history (15%), which is the amount of time you've held your accounts.
- New credit accounts (10%), which is the number of hard inquiries on your credit within a short period of time.
- Credit mix (10%), which covers the various types of accounts you hold.
While it's a good idea to work on improving all of the above factors, it pays to focus your efforts on the two that carry the most weight: payment history and credit utilization ratio.
Improving your payment history
Your payment history is a reflection of how responsible you are as a borrower, and so it carries more weight than any other category when determining your credit score. The best way to improve your payment history is to make a point of paying every single bill you get on time from this point forward. It's really as simple as that. Keep in mind that if you're unable to pay your credit card bill in full, but manage to make your minimum payment each month, your payment history won't get dinged -- though you will accrue interest charges and put your credit utilization ratio at risk.
Lowering your credit utilization ratio
Your credit utilization ratio speaks to how much of your credit you're using at once. For it to help your score, that number needs to stay at or below 30%, which means that if your total line of credit is $10,000 and you have $3,000 in outstanding charges, you're in the clear. However, if you then tack on another $1,000 to your balance and can't pay it off, your ratio will rise to 40%, at which point it can hurt your score.
Keep in mind that it's possible for one person to have a higher level of outstanding debt than another, but a lower credit utilization ratio. Imagine your total line of credit is $10,000, but you owe $5,000. That's a 50% ratio -- no good. Now your neighbor might owe $6,000, which is more than what you're on the hook for, but if his total line of credit is $18,000, he'll be right at that 30% mark. In other words, when it comes to managing your credit utilization ratio, focus on percentage, and not just the number you owe.
So how do you lower that ratio? There are two ways. First, start paying off some of your existing debt, which, incidentally, will save you money as well. Second, contact your credit card companies and ask for an increase in credit limit. If you have a reasonably strong history of paying your bills, those issuers might comply, especially since, conceivably, it means that they might get more business out of you going forward. Of course, you'll need to avoid taking advantage of those higher limits if you want your credit utilization ratio to improve, but having them could help that number significantly.
Your credit score matters
The fact that Americans are so concerned with their credit scores is actually a good thing, because that number can have a greater impact than anticipated. You probably know that having good credit can increase your chances of getting approved for a mortgage, apartment rental, or car loan, but in some cases, having too low a credit score can actually prevent you from getting a job. That's right -- some employers run credit checks on prospective hires, and amazingly enough, it's not illegal for them to do so in many parts of the country. That's just another reason it pays to boost your credit to the greatest extent possible, even if it means exercising a ton of discipline along the way.