Your credit score is undeniably one of the most important numbers of your adult life. It’s something that not only determines whether or not you’ll get approved for a credit card, but also if you can open a bank account, have a cell phone plan, set up utilities (like gas and electricity), and even find a place to live.
Also known as your FICO score or credit rating, your credit score is characterized by a number that can be anywhere between 300 and 850. The higher your number, the easier time you’ll have getting approved for new credit lines because it demonstrates to future lenders that you’re financially responsible.
There’s no secret to getting a high FICO score. FICO publishes what factors influence your score on their website. It’s based on information contained within your credit history as reported to the three major credit bureaus: Equifax, Experian, and TransUnion.
So what are some actions you can take to build a bulletproof credit history? In this post, I’m going to show you how to increase your credit score using seven of my favorite strategies.
1. Always Make Your Payments on Time
The first thing you need to do is make your payments on time and pay at least the minimum required amount. These two aspects account for 35 percent of your FICO score.
On-time payments show lenders you can reliably repay your debts on time. Additionally, sending in at least the minimum required payment shows you have the means to meet your financial obligations.
If you miss even just one payment, it could have a significant impact. To give you some idea, FICO’s credit damage data found that one recent late payment can cause as much as a 180-point drop on a FICO score. The actual value will depend on how long the payment has been delinquent and how much was underpaid.
This is why it’s very important to keep this cycle up month after month. If you do this, then your accounts will always remain in good standing and make your credit report look great.
2. Mind Your Credit Card Balances
Even if you’ve got the means to spend as much as you want, you’ll want to be careful not to put too many purchases on any single credit card. This is because of something called your credit utilization ratio. This factor accounts for 30 percent of your FICO score.
Your credit utilization ratio is the total amount of money owed on revolving credit lines divided by your credit limit. For example, if you have a credit limit of $10,000 and your balance at the end of the billing cycle is $2,000, then your credit utilization ratio would be reported as 20 percent.
It’s been recommended by FICO that you should never exceed 30 percent for any given billing cycle. Spending any more than this could be interpreted by the lenders as a sign of reckless credit usage and will result in a lower score. In fact, keeping your credit utilization ratio to 10 percent or less is optimal.
3. Keep Your Cards Open for as Long as Possible
If you’ve got older credit cards that don’t charge an annual fee, then keeping them open for as long as possible will help improve your score.
This will be for two reasons. First, it will show you’ve got more available credit and help keep your utilization ratio down. Second, it will improve the age of your accounts which contributes 15 percent to your FICO score.
Thinking strategically, if you don’t mind managing additional credit cards, then you could apply for 1 to 2 extra accounts. That will increase your available credit as well as add to the age of the accounts the longer they stay open.
4. Don’t Apply Too Often Too Soon
Every time you apply for a credit card, loan, open a bank account, or even get a new cell phone, the lender will have to pull your credit report before giving you approval. This pulling of your credit report is what’s known as a hard inquiry.
While there’s nothing wrong with applying for these types of products, it’s important to keep in mind that if you do this too many times within a 12-month period, then it can negatively impact your credit score by as much as 10 percent. This is because it will appear to lenders as if you’re in some sort of financial distress.
The best approach is to keep your applications with hard inquires to a minimum. Be strategic and spread them out as far apart as possible from one another.
5. Have a Mix of Credit Lines
Credit cards aren’t the only way to build credit. Having other types of credit lines like mortgages, auto loans, and personal loans can be a good way to demonstrate your responsible financial habits. Plus, having a mixture of different types of accounts will contribute as much as 10 percent to your overall score.
If you’re considering getting one of these types of loans, then use it as an opportunity to improve your FICO score. Just remember that like your credit cards that payments always need to be made on time and in full.
6. Check Your Credit Reports for Errors
From time to time, credit reports have mistakes. Sometimes it’s a mixup by the software, but other times it could be a fraudulent account you never opened. Either way, this could lead to a reduction in your FICO score.
The best way to combat this is to periodically review your credit reports. They can be downloaded for free three times per year (once every 12 months from each of the three major credit bureaus). Alternatively, you can even sign up for free credit alerts from Experian.
7. Don’t Let Balances Revolve
When it comes to credit cards, making just the minimum payment or anything below the full balance will cause the remaining balance to revolve. This means it will carry over into the next billing cycle and start accruing interest.
While being charged interest will not hurt your credit score, your revolving balance will count towards your credit utilization ratio. This is another opportunity to potentially exceed 30 percent of your available credit if you’re careful.
You may be able to get away with one or two cycles where your credit total use credit is below the threshold. But if this cycle continues for too long, it will eventually exceed the 30 percent threshold and start to harm your credit score.
If you’d like to ensure that your spending stays on track and doesn’t exceed your budgeted amount each month, then let an app like Buxfer help. Buxfer can be linked to each of your credit card accounts and will automatically keep track of all your transactions in real-time. Purchases can also be tagged and categorized for easy review so that you know where your money is going each month.
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