You care about having the highest credit score you can, right? You should, because your credit score can influence many aspects of your financial life. Everyone from lenders to insurers to potential landlords (and even potential employers) is interested in how creditworthy you are.
If your score isn't excellent, there are ways to beef it up. Here's an introduction to credit scores, plus three simple tricks to increase yours. See which ones you can use.
Image source: Getty Images.
Credit scores, explained
There are three major credit agencies -- TransUnion, Experian, and Equifax -- that keep records on how you manage your financial life, such as whether you pay bills late or on time, whether you miss any payments, and how much you owe to which lender. Data from your credit records and histories are then used to calculate credit scores, and these scores are used by prospective lenders to help them decide whether they want to lend to you, and what interest rate they want to charge you.
Credit scores fall in different ranges according to which score you're looking at. Basic (non-industry-specific) FICO scores, which are used by about 90% of top lenders, range from 300 to 850. Here's how the folks at FICO rate the scores, along with how good or bad they make you look to prospective lenders:
|
FICO Score Range |
Rating |
Likelihood of Borrower Becoming Delinquent |
|---|---|---|
|
800 and higher |
Exceptional |
1% |
|
740-799 |
Very Good |
2% |
|
670-739 |
Good |
8% |
|
580-669 |
Fair |
28% |
|
579 and lower |
Poor |
61% |
Source: MyFICO.com.
If your score is just fair or poor, you should definitely work to improve it, and it's even worth boosting a good score to a very good or excellent one. Here's an example of why better scores are desirable -- reflected in the kinds of interest rates you may be offered if you're borrowing $200,000 via a 30-year fixed-rate mortgage:
|
FICO Score |
APR |
Monthly Payment |
Total Interest Paid |
|---|---|---|---|
|
760-850 |
4.262% |
$985 |
$154,703 |
|
700-759 |
4.484% |
$1,011 |
$164,129 |
|
680-699 |
4.661% |
$1,033 |
$171,733 |
|
660-679 |
4.875% |
$1,058 |
$181,030 |
|
640-659 |
5.305% |
$1,111 |
$200,043 |
|
620-639 |
5.851% |
$1,180 |
$224,803 |
Source: MyFICO.com, as of July 27, 2018.
The difference between the highest and lowest interest-rate range in the table above is $195 per month (which is $2,340 per year) in mortgage payments -- and about $70,000 in total interest paid! Clearly, improving a bad credit score can save you a lot of money.
Here, then, are some ways to do so:
1. Fix mistakes in your credit record
One rather painless way to start is to review your credit reports, to see if there is any incorrect information on them. If your credit histories contain errors (and it's not unusual for them to do so), then your credit score will not be representing you accurately. You can get free copies of your credit reports once a year from each of the main credit reporting agencies via www.annualcreditreport.com. And it's smart to do so, no matter what your score is. If you spot errors, each agency has ways for you to go about fixing them. And you can often do so online.
If you're wondering what kind of mistakes you might find, know that one common error is a "mixed" record, where the agency has included some information from the record of someone else who bears your name or a version of it. If you've been a victim of identity theft, that might have resulted in some bad information getting into your record, too -- such as accounts you didn't open. You might also spot accounts that you closed listed as open, or incorrect credit limits or balances due on various credit cards, among other things.
Image source: Getty Images.
2. Start exhibiting responsible financial behaviors
About 35% of your credit score is tied to your payment history. If you've repeatedly paid bills late or have missed some payments, stop doing that. By paying bills off on time from now on, your score will start to rise due to that factor alone. Remember that just about any creditor can report you to credit agencies -- landlords may report you, as might owners of a storage unit you rented, and plenty of others to whom you owe money. Even a late or unpaid library fine can end up dinging your score, as can overdrawing on a line of credit at your bank that's meant to protect you from overdraft fees.
If you don't have any credit cards, you can build a strong credit record by getting one or two and then using them responsibly, paying the bills on time.
3. Pay down debt
This credit-score-raising trick isn't always easy, but it's simple and very effective. Since about 30% of your credit score is tied to how much you owe, aim to pay off as much debt as possible, as soon as you can. Lenders don't want you to have maxed-out your credit limits or to even come close. Aim to get rid of high-interest-rate debt first, as those credit card rates of 20% or higher are much more costly to you than a 5% mortgage or car loan. Resist feeling like paying off your debt is an impossible goal, too. Know that many people have paid off tens of thousands of dollars of debt -- some more than $100,000! -- and have gone on to live financially healthier lives.
For credit score purposes, aim to have borrowed only about 10% to 30% of the sum of all your credit limits. That's your "credit utilization ratio," and lenders like to see it below 30%. After all, they're considering lending you money, which will increase your debt load, so if they see that you're already carrying a lot, that can make you a less attractive prospective borrower. One simple way to improve your credit utilization ratio is to increase your credit limits. It's worth calling your credit card issuers and asking if your credit limits can be hiked.
There are other ways you might boost your credit score, too. A little time and effort spent working toward a high score can pay off handsomely -- especially if you're planning to take on a mortgage in the near future.
