Could your credit score use a boost?
There's a lot at stake with those three digits. Your credit score can influence whether a landlord approves your rental application, how much you'll pay in home and auto insurance rates, and the interest rate on your mortgage. And the higher your credit score, the more money you can save. If your score is a little low, U.S. News My Money bloggers have some tips to help you bump it up.
But first, what is a credit score?
Credit scores measure your creditworthiness and are used by lenders to judge whether you'll pay back debts. "A low score warns lenders that you might be an unreliable borrower, which can thwart you from getting the credit you need," writes Credit Karma contributor Jenna Lee. "A high credit score can save you tens of thousands of dollars in interest over the life of your loans." Credit scoring models typically range between 300 and 850. A "good score" depends on your needs. For example, a FICO score of 720 can land you decent loan interest rates, while 650 may help you secure a credit card, according to Lee.
To start improving your credit health...
Request a copy of your credit report from annualcreditreport.com. You're entitled to one free copy from each of the three credit bureaus -- TransUnion, Equifax and Experian -- once per year. If you've never pulled your reports, you can request them all at once. "Otherwise, pull a different report every four months so you can check up on your credit throughout the year," Lee recommends. Once you have your reports...
Check for any errors.
A 2013 Federal Trade Commission study found one in four consumers had errors on their credit reports that could affect their credit score. So it's a smart idea to regularly review your report. Check for correct information about your identity (the spelling of your name, address, etc.) and that your proper credit limits are listed. Also make sure there are no fraudulent accounts you do not recognize. If you find an error, follow Lee's advice in "How to Dispute Credit Report Errors." If everything looks right, it's time to adjust your financial habits to boost your score. Here's how:
1. Pay bills on time.
The largest component of your credit score (35 percent) comes from your payment history. Therefore, the more bills you pay on time, the higher your score will be. Are you sitting on a stack of late bills? Start by tackling the oldest ones, advises Dough Roller contributor Abby Hayes. "Accounts that are 90 days late will have a bigger negative impact on your score than those that are 60 or 30 days late," she writes. "So pay off the most past-due accounts first, and gradually catch up on all your payments."
2. Don't open a lot of new accounts at once.
Each time you apply for a regular or retail credit card, the issuer checks your credit report to decide whether it should extend credit to you. This results in a hard inquiry that will slightly ding your score and may cause lenders to think you're a bigger credit risk. "Since a lot of hard inquiries may make it look like you're desperate or aren't getting approved for credit, it's best to minimize how often you apply for more credit," Lee writes.
3. Limit other sources of hard inquiries.
Applying for a shiny new credit card isn't the only way to get hit with a hard inquiry -- many companies and financial institutions will pull your report before making lending decisions. "Even renting a car, getting a TV or high-speed Internet account, or opening a checking account may incur a credit inquiry," Lee warns. Keep in mind that any business that pulls your report must first get your permission, so you'll know if this happens ahead of time.
4. Lower your credit utilization rate.
About 30 percent of your score is determined by your credit utilization, or the percent of available credit you're using. The lower your utilization rate, the better your credit score. To calculate your rate, divide your total credit balances by your total credit limits. "Consumers with a credit utilization rate between 1 and 20 percent generally have a higher credit score than consumers with a credit utilization rate over 20 percent," writes Credit Karma's consumer advocate Bethy Hardeman.
5. Ask for higher credit limits.
One easy way to lower your utilization rate is to request higher credit limits from your credit card issuers. MyBankTracker.com contributor Simon Zhen shares three ways to increase your spending limits:
1. Your card issuer might automatically increase it.
2. You can ask your credit card issuer online or by phone.
3. You can transfer a portion of one card's spending limit to another card, as long as both cards are under the same issuer.
6. If you were denied a higher limit...
You can try again in a few months. But NerdWallet contributor Lindsay Konsko offers other ideas to lower that debt-to-credit ratio, starting today:
-- Stop charging. Put your cards away, and switch to cash.
-- Cut unnecessary expenses from your budget to free up money for extra payments on your card.
-- Track your spending, and avoid temptations to break your budget.
-- Consider taking on extra work, and devote your surplus funds to debt payoff.
7. Pay bills in full.
Paying bills in full each month won't directly boost your score, but it can help keep your credit utilization low. Plus, you'll avoid the interest payments, and stay out of credit card debt.
8. Keep old accounts open.
Thinking about closing some old cards to make some room in your wallet? Not so fast. About 15 percent of your credit score comes from the length of your credit history. Closed accounts in good standing will remain on your report for about 10 years, Lee explains, but once they falls off, it will lower the average age of all your accounts -- and lower your score.
9. Use your cards, even the oldies.
OK, so you'll just tuck that old card in the back of your wallet to help your credit history, but not actually use it. Bad idea. "Some credit card issuers will mark your credit cards 'inactive' after a certain period of time, and they may even close the credit card account," Hardeman explains. If that happens, the card's limit will no longer be factored into your utilization rate, and it could lower your score. A better idea: Make an occasional purchase on the card, and pay it off on time and in full.
10. Pay off student loans.
Remember the tip about on-time payments? You can give your credit score some love by paying your student loans in a timely manner. "If you pay your student loans in full and on time each month, the credit bureaus will make a record of that on a continuing, 30-day basis," writes NerdWallet contributor Divya Raghavan. "And that will demonstrate to future lenders that you can be trusted to handle money responsibly."
11. Avoid derogatory marks.
Of course you want to stay out of financial trouble, but you especially want to avoid derogatory marks. These include negative records such as a bankruptcy, foreclosure, account in collections, tax lien or other civil judgment. "Since these marks indicate that you've mismanaged credit in the past, they can severely hurt your score," Lee writes.
12. Pay your parking tickets and library fines.
It may seem trivial, but an unpaid parking ticket or library fine could be turned over to a collections agency. And a collections account is one of those derogatory marks that can "do significant damage to your credit score," Hardeman warns. "If you know you have unpaid fines, pay them as soon as possible so you won't be surprised by a collections account down the road."
Aim high, but not for perfection.
If you follow the previous advice, chances are you'll see your score tip in a positive direction. But don't bank on reaching that coveted 850. In 2010, the Fair Isaac Corporation, which created FICO scores, estimated that about only 0.5 percent of consumers achieve a score of 850. As Lee puts it, "While it doesn't hurt to desire and try to obtain an excellent score, you don't need a perfect score to get the best rates as a consumer."
Stephanie Steinberg is an Assistant Editor for Money and Health & Wellness at U.S. News. You can follow her on Twitter @Steph_Steinberg, connect with her on LinkedIn, circle her on Google + or email her at firstname.lastname@example.org.
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