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Everyone has a credit score — a number that tells lenders exactly how good you are at handling your debt and paying it back on time. When it comes to this score, the higher the better. So, unless yours is over 800 — considered exceptional under the FICO model — there’s always room for improvement. Of course, improving your credit score is even more important the lower your number is.
What is a credit score and why is it important?
Lenders use your credit score to determine how much of a credit risk you are, including how well and promptly you pay your debts down. Let’s say you want to buy a car or a home, sign up for a cell phone or a utility service or rent an apartment. Lenders, service providers and property managers considering you for any of these are likely to pull a copy of your credit report, which includes this score.
“Credit scores play a significant role in financial decisions of all sorts today,” said Rod Griffin, director of consumer education and advocacy for Experian. “Having good credit scores saves you money because you will be eligible for better loan and credit card terms and rates.”
Credit reports are issued by a number of credit bureaus, including Experian, TransUnion and Equifax, considered the major bureaus. Your FICO credit score, created by the Fair Isaac Corp., is calculated using the data from these major credit bureaus.
The breakdown of FICO credit scores look like this:
|Credit rating||Credit score range|
7 ways to improve your credit score
If you’re looking to improve your credit score as you work to lower your debt load, there are a number of ways to do it:
1. Pay your bills on time.
One of the most useful things you can do is pay your bills on time. If you are more than 30 days late on a payment, it is then reported to the credit bureaus. That late payment not only dings your credit score, but also stays on your report for a whopping seven years. You can dispute it if you feel that the reporting was made in error, but otherwise the best thing to do is work hard to keep your accounts current and your hard work will be rewarded with an improvement to your credit score.
2. Set up automatic payments.
You might use computer reminders to pay bills or write it on a calendar, but sometimes even the most organized person forgets to pay a bill on time. This can lead to late charges and a dip in your credit score.
“Setting up automatic payments won't directly affect your credit score, but it ensures that your payment is made on time, all the time, and that's what will help to improve the credit scores,” Griffin said.
3. Manage your balances.
How much of your credit card limit you have used affects your credit score. The credit bureaus call it your credit utilization rate. The rate is determined by a simple formula — how much revolving credit you have used divided by how much revolving credit you have been given. The higher your credit utilization ratio, the more of a risk you are.
“If you're running up your balances each month, or carrying a high credit card balance from month to month, it’s a sign of risk and it's going to have a significant impact on your credit scores,” Griffin said. “The best thing you can do is pay your balances in full each month.”
Thus, it’s best to use some of your credit and have a low credit utilization radio than not use any of it at all.
4. Pay off credit cards, but …
Yes, paying off your credit card balances helps to improve your credit score and lighten your debt load, but don’t close the account. “If you close the account, you lose the available credit limit, which causes your overall utilization rate to go up, and that causes your credit score to go down,” Griffin said.
As a result, your balances are now a higher percentage of your available credits, making you a bigger risk. If you don’t want to use the account anymore, cut up the card or put it away somewhere safe, so you’re not tempted.
5. Have a long, healthy credit history.
You can’t control the length of time that you’ve had credit, but the longer you keep your accounts open, the more your credit score will inch up over time. Your credit history is worth 15 percent of your FICO score. It includes how long many years revolving credit accounts have been open, starting with your oldest account.
6. Dispute any credit report errors.
You received a free copy of your credit report and find out that you have charged thousands of dollars on a local department store credit card. The problem is you’ve never had that credit card. Maybe your credit report still maintains you didn’t pay off your hospital bill, and now it’s in collections. You have documentation that you did. In both cases, you should contact the credit bureaus to dispute these charges. The company will review them and remove them, if they find you are not at fault. Your credit score will improve because you’ve removed two negative errors.
7. Try out alternative scoring methods.
There are new programs available to help boost your credit score, especially if you have a short credit history, low credit scores or a thin credit profile. For example, UltraFICO, expected to launch soon from FICO, Experian, and Finicity, gives the option to have your bank deposit account data possibly considered in your credit score. If you responsibly manage your checking and savings accounts, that could slightly lift your credit score with this new service. It’s the first time a credit scoring model will be influenced by information found outside of your credit reports themselves.
Another is Experian Boost, which allows you to add your positive cell phone, utility and cable payments to your credit history to help boost your scores. When you sign up for this free service, you give Experian permission to access these accounts each month and pull them into your credit report.
The bottom line
The bottom line is that your credit score affects the interest rate you’ll pay on credit cards and whether you’ll be approved for that new hot car that you’ve been eager to drive. Because employers now sometimes look at modified credit reports, too (they don’t see the credit score, but do see your payment and debt histories), you might even lose out on that great new job simply because you didn’t pay your bills on time.
Work hard at developing a system to remember to pay your bills and use cash instead of credit as part of your overall strategy to reduce your debt.