You may not put much thought into your credit score until the time comes to apply for some sort of major financing, like a mortgage or auto loan. But having good credit won't just increase your chances of getting approved; it'll also help you snag a more favorable interest rate. However, even if you're not buying a new house or car anytime soon, a better credit score can help your finances in more ways than that most-obvious one, so it's worth doing what you can now to become a more desirable borrower in the eyes of lenders -- and a more responsible individual in the eyes of others ranging from insurers to potential employers.
What's in a credit score?
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Before you can work on improving your credit score, you'll need to understand what goes into that number in the first place. It has five key components:
- Payment history (35%), which measures your tendency to pay bills on time;
- Credit utilization ratio (30%), which represents the percentage of your available credit you're using;
- Length of credit history (15%), which is the amount of time your various active accounts have been open;
- New credit accounts (10%), which speaks to the amount of new borrowing you're doing;
- Credit mix (10%), which is the variety of accounts you hold.
As you can see, certain factors carry more weight than others, so focusing on those can help you boost your score more quickly.
Establish a solid payment history
One of the most efficient ways to improve your credit score is to consistently be on time with your payments. Your payment history is the single largest factor in your credit score, and being 90 days late or more on even a single payment will drag that number down. If you find remembering to pay your bills a challenge, set up calendar reminders that will help you avoid accidentally missing due dates in the future. You can also set up direct debits with your bank to pay certain recurring bills automatically, thus taking the chance of human error out of the equation.
If you've been late with payments because of cash flow problems, reexamine your spending, and make sure to never charge more on your credit cards than you can afford to pay off each month. Even if you can't always tackle your balances in full, making your minimum payments will help you avoid black marks on your payment history.
Pay down some of your existing debt
Another way to improve your credit score is to eliminate some of your present debt, which will help bring down your credit utilization ratio. Having a ratio above 30% can really hurt you, so if, for example, the sum of all your credit lines' limits is $10,000, you'll want to keep your cumulative outstanding balance below $3,000. If your current debts have pushed you above that 30% threshold, paying a few of them off might help you dip back down below. Plus, the sooner you get rid of some of that outstanding debt, the less money you'll waste on interest charges.
Be cautious when opening new accounts
Though new accounts won't impact your score nearly as much as your payment history or credit utilization ratio, opening too many at once could damage your credit score. Applying for several credit cards or loans at once sends a message that you're heavily reliant on borrowing, which isn't what you want lenders to think. On the other hand, if you make a point not to open too many new accounts in too short a period, you'll show that you're a responsible borrower who uses debt in moderation.
Review your credit report often
Credit reports aren't always accurate. In fact, an estimated 20% contain errors. That's why it pays to consistently check your credit report and dispute any mistakes you notice. Unfortunately, a good 30% of Americans don't review their credit reports on a regular basis, and those folks are really putting their scores at risk.
According to a Federal Trade Commission report, about 20% of consumers who identified credit report errors saw their scores improve enough as a result of the correction to put them in a better credit tier, which qualifies them for better loan rates, among other benefits. You're entitled to a free copy of your credit report every year from each of the three major bureaus (Equifax, Experian, and TransUnion), so be sure to request yours and examine it from cover to cover. Fixing a simple mistake could be just the thing to boost your credit score overnight.
Your credit score isn't something you can afford to sit back and ignore. The more work you put into improving it, the bigger the financial benefits will be.
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