One of the most important numbers to know besides your social security number and family members’ birthdays, is your credit score. Why? Because so many major life occurrences revolve around your creditworthiness rating. Your ability to purchase a car, obtain a credit card, apply for a mortgage, even get a job, can be helped or hurt depending on your personal financial health.
A credit score, no matter if it’s derived using the traditional FICO method or its more recent counterpart – VantageScore, is essentially a measure of how well you have performed as a borrower since you began assuming credit lines. While young people have very little credit at first; over time, as they accrue credit cards, student loans, and auto loans, a credit trail begins to lengthen. Everything in that trail contributes to the overall score of their creditworthiness.
Why You Should Know
Knowing your score is the key to understanding where you stand before applying for the next big loan, such as a mortgage or a home equity line of credit. If you’re having trouble getting credit at all, knowing your score will tell you, at minimum, you need to look into your credit report and see what areas you can improve.
Even if you have a good credit score (700 and above), there’s always room for improvement. Your ability to move from a good credit score to an excellent score, or even from fair to good, translates to money in your pocket — thanks to lower interest rates on new debt. No matter what your score is, knowing where you stand financially can help you manage expectations and help you stay focused on implementing the best personal financial practices.
Ways To Improve
Once you’ve seen your score, you may be wondering what steps you should take now to improve it. This can best be answered by evaluating your credit report thoroughly to identify specific areas of weakness. Overall, you’ll want to make sure that you have every aspect covered to ensure you’re doing everything possible to obtain the best credit.
Pay Bills On Time
The biggest portion of your credit score (35%) is calculated based on the timeliness of payments. As long as your payments are made on time, this part of your score should be a positive contribution to the overall number. Even if you’ve missed payments in the past, or had difficulty with making payments on certain accounts, once you start making all your payments on time consecutively, you can directly and immediately see an impact in your credit score.
Keep Low Balances
On credit lines such as credit cards, where credit is revolving, the lower the balance you maintain on these accounts, the better. That’s because 30% of your credit score is based on your debt to credit ratio. Obviously a home mortgage can’t be managed in this way, but credit card balances have a huge implication on your overall score.
You may have the urge to just get rid of credit cards altogether because debt is so easy to accrue with these lines of credit. Instead, using your cards as a reward or cashback maker is a way to generate savings while keeping your balance low. Use these cards to make your everyday purchases and then pay them off each month while earning valuable rewards points or cash back.
Avoid Hard Inquiries
There are two types of credit inquiries that creditors initiate. Hard inquiries are those that are initiated on your behalf, whether it be a credit card application or an inquiry for an auto loan. Too many hard inquiries made recently and in a short window of time can temporarily damage your credit score. So before you apply for an attractive credit card on a whim, think about your actual chances of being approved for it, and whether having it will really benefit you enough to make the temporary ding in your credit worth it.
Soft inquiries, on the other hand, are those initiated by creditors that are not necessarily initiated by the consumer. It could be done by lenders looking to solicit loans to consumers, or when multiple banks inquire at once to compete to give you a home mortgage or automobile loan. In this particular case, only one instance of an inquiry will hit your report. The rest will go unpenalized. Soft inquiries, for the most part, are beyond your control, and therefore have no impact on your credit score.
According to the Federal Trade Commission, all consumers are entitled to “one free copy of their credit report every twelve months from each of the three nationwide credit reporting companies.” You can get yours online at annualcreditreport.com. Finding mistakes in your report is not uncommon. No matter how small the mistake, rectifying them can make a positive impact on your credit score.
Wait It Out
Some bad marks on your credit just take time to go away. Major events like bankruptcies or foreclosures are unfortunate and often a consequence of life events or poor decision making. But they won’t last on your credit profile forever. Bankruptcies will not be counted against you after seven to ten years from the date they first appeared on the report. Foreclosures take about seven years.
Don’t Close Old Accounts
A small portion of your score is based on credit history. The longer your history is established, the higher your credit score will be. This means you shouldn’t be closing that old credit card you don’t like anymore. Instead of closing it, call the card company and renegotiate the rates. Lenders will also close your account due to inactivity. So make sure the cards you have are used regularly. Just make sure you pay them off every month and don’t spend what you don’t have.
Keep Your Credit Well Balanced
Any investment that will grow or translate into long term income is considered good debt, such as a mortgage. Credit card accounts do nothing in terms of providing good debt since there’s no growth or collateral to back it up. While a part of having credit means some revolving accounts, healthy credit scores have a good mixture of both. One great way to improve credit score is to own a home. While the initial mortgage hard inquiry will hurt your credit short term, the long term benefits outweigh the hit.