There are advantages to having good credit. It gets you better service, better terms, and wastes less money.
Look up your FICO Score. Where do you measure up?
- 800+ You’re Killing It
- 740-799 You’re Way Ahead Of The Pack
- 670-739 Pretty Good
- 580-669 You Can Scrape By
- Less than 579 Time For Some Open Heart Surgery
The people at the top get the best deals. When a money lender hands over cash, they never really know if they’re getting that money back. The closer you are to the 850 ceiling, the more confident they are that you’re a safe bet.
If you’re not a safe bet, they take precautions.
Lending companies like to see a nice consistent flow of money coming into their accounts. If they think you’re going to be late, or miss payments, they charge you more. That’s their way of smoothing things out over the long haul.
That means you’re paying more interest on your mortgage, paying more premiums on insurance, and money lenders won’t lend you as much. Sometimes they won’t lend you money at all.
FICO basically breaks down your score like this:
- 35% How reliable you’ve been at making payments
- 30% How much of your current credit are you actually using
- 15% How long you’ve had accounts
- 10% How many times other lenders look up your score
- 10% What kinds credit do you have
This gives you clues on how get your score to climb upwards.
Pay your bills on time
Missing credit card payments triggers late fees, move your interest rate up, and have an immediate downwards impact on your Credit Score. The opposite is true to as well, paying your debts on time shows you’re more reliable. Paying on time is one of the most important things you can do.
Get more available credit
Assuming you’re in control of your payments, it actually works in your favor to have more available credit. It’s recognized as a percentage.
If your credit card bill is $100 and you have $1000 total credit available, you’ve used 10% of your credit. If you’ve got an identical card with no balance, or if you call the company and ask them to up your limit to $2000, the ratio changes. Now your $100 bill is 5% of your available credit.
This is called ‘Credit Utilization’. A good number to shoot for is 30% or less.
To make this work, you must pay your bills on time. The ratio can be improved by getting more credit (which makes more sense if you make more purchases) or use your existing credit less.
Remember, there are side benefits of paying with credit over cash. Air miles, extra warranties, check with your credit card provider.
Also keep in mind that canceling a card has the opposite effect. If you’re available credit drops from $2000 to $1000, that $100 climbs from 5% to 10%.
It generally looks better to money lenders if you’re not 100% reliant on making your purchases on credit every month.
Keep accounts active for a long time
If you’ve had one or two credit cards for ten years rather than opening and closing accounts every two years, money lenders are willing to trust you more. Makes you seem more stable.
Even if you find yourself using one card 99% of the time and the other one is collecting dust, use the inactive one once in a while to make sure it remains active. Consider calling up the company and ask them to switch it to a card with no fees (switching is fine).
Keep An Eye On Credit Inquires
If you’re rate-shopping for a loan, you’ll have multiple credit inquiries made about you. That doesn’t look bad per se in the short term.
However if it starts to drag on over weeks, or if you open multiple credit accounts, that raises some eyebrows. It’s potentially a flag that your financial situation has suddenly made a turn for the worse and causes your score to drop.
This corrects itself over time if the credit inquires stop. Just be aware of it. Rate shopping for a few weeks is fine, rate shopping over the course of a year is not.
For most people, those are all you’ll need to improve your Credit Score. Take some of these steps, and check your score again down the road. The longer you work at it, the better your score becomes. If you’ve already got significant debt from large purchases, just continue to be consistent with your payments (or pay more if you can).
Getting into that 800+ bracket can take years. It is, however, worth it. So get on it.