3 Quick Ways to Improve Your Credit Score
Your credit score is a critical number – it helps lenders and creditors assess your credit worthiness and re-payment risk. Credit scores become very important when you want to buy a house, finance a car purchase, or apply for a graduate school loan. If any of these big ticket items are on your horizon within the next year, you should check out your credit health now and take steps to improve your score if necessary.
You’ll typically qualify for the best possible loan terms with a credit score (also called a FICO score) of at least 760. It’s important to know that your credit score is a composite ranging from 300 to 850 and is determined by the following factors:
- Payment history (35%) – Pay all of your bills on time to get the highest marks possible, and use auto-pay options if you find that you’re sometimes late in paying.
- Debt Owed (30%) – Your score is higher when you’ve paid off a significant chunk of an installment loan, which is a loan that you re-pay in the same amount each month (e.g., mortgage, car loan, student loans). You also get points for keeping your debt balance low; this means that you utilize only a small portion of your available credit each month.
- Length of credit history (15%) – Keep your oldest credit cards active by using them at least a few times a year. Your credit score improves as the time you’ve held active credit increases.
- New credit (10%) – Don’t apply for lots of new credit; you should only have two to four credit cards. If you must apply for new credit, make sure you don’t try to obtain credit from multiple sources in a short time period. Waiting several months or even a year between credit requests will protect your score.
- Types of credit used (10%) – You should have several types of loans, including revolving (e.g., credit cards), installment, mortgage, etc. Carrying a diverse set of debt helps you prove that you can pay off multiple types of loans, which increases your credit score.
There are three major credit reporting bureaus – Experian, Equifax, and TransUnion, and each bureau calculates scores slightly differently. What do you do if one or more of these bureaus indicates that your score is less than 760? Here are three quick ways to boost your score if it’s not quite high enough to obtain the best rates:
- Make sure you have a low debt balance, which is the measurement of total debt outstanding divided by total credit available. For example, a credit card balance of $3,000 and a credit limit of $10,000 equates to a 30% debt balance. Call your credit card companies today and request higher credit limits for your cards. Aim for a debt balance of less than ten percent.
- Don’t cancel any cards before you obtain your “big ticket” loan unless you have a good reason. Older credit cards are especially important to help increase the average age of your credit history, which is a direct positive factor in your credit score. Remember that you typically want to carry two to three cards that you use and pay off in full each month. If you have more than that, leave them open and don’t use them.
- Limit the amount of hard pulls on your credit history. Hard credit inquiries are required before you can sign an apartment lease, set-up wireless phone service, or apply for a new credit card. Try to avoid any hard pulls until after you’ve secured a favorable interest rate on your upcoming loan.
Check out FICO’s credit score estimator to see how your score currently stacks up, and don’t forget that you get one free credit report from each of the three credit bureaus each year – make sure you visit annualcreditreport.com to request yours!
By: Gale Bowman
11-22-2009
After graduating from Notre Dame, Gale realized that young professionals need a source of reliable information as they face “real world” challenges. Gale manages WhatCollegeForgot.com and is pursuing an MBA at the University of Chicago Booth School of Business.
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