Your credit score not only affects your interest rate for a mortgage, car loan and credit cards, but it can also have an impact on your car insurance premiums and even your ability to rent an apartment or get a cell phone. It’s important to stay on top of your credit score even if you don’t plan to apply for a loan soon.
The most common credit score is the FICO score, which generally ranges from 300 to 850, with scores above 800 considered to be exceptional. You generally need a score of at least 760 to qualify for the best mortgage rates. But there are many versions of credit scores. FICO provides several industry-specific scores, such as a special version for car insurers, and other companies have created credit scores with a different scale that are used by some lenders. The following steps can help you improve any type of credit score.
–Check your credit reports for errors. Your credit score is based on information in your credit reports. If you have different information in your credit reports from each of the three major credit bureaus – Experian, Equifax and TransUnion – you may have three different scores. Check your credit reports from all three credit bureaus and fix any errors that are bringing down your score. You can generally get a free copy of your credit report every 12 months from each of the three bureaus at www.annualcreditreport.com (and because of COVID-19, the bureaus are offering free weekly reports through April 2021).
–Pay your bills on time. This is the most important factor in your credit score, accounting for more than one-third of your FICO score. Even if you can’t afford to pay your credit-card bill in full, at least pay the minimum so your credit score doesn’t take a hit.
–Understand your “credit utilization ratio.” The amounts you owe accounts for 30% of your FICO score. One key factor in this category is your “credit utilization ratio,” which is the percentage of revolving-account credit you’re using – based on how much you’ve charged compared to your credit limits. Lenders get worried if they see your charges coming close to the maximum. Keep in mind that this number is based on your credit-card balances when your lender reports the information to the credit bureau, not how much you pay by the due date. So if you have a $10,000 credit limit and you charged $8,000 when the card company reports your balance (usually the balance from your monthly statement), your credit utilization ratio will be 80%, even if you pay the bill in full and have a $0 balance by the due date. It’s generally a good idea to keep your utilization ratio at 30% or lower – people with high scores tend to have utilization ratios of 10% or less – or to pay off your balance before it’s reported to the credit bureau. See the Amounts Owed section at MyFico.com for more information.
–Be careful before closing old credit cards. Another factor in your credit score is the length of your credit history, and keeping older cards open can increase the average length. Also be careful before closing any credit cards if you have a balance on other cards – your credit utilization ratio is calculated based on each card and also across all of your revolving accounts. Closing out the card and losing that credit limit in the calculation will increase your overall utilization ratio if your balance on the other cards remains the same. There may be other factors to consider, however, such as whether the old card charges an annual fee.
For more information about the factors that can affect your credit score, go to the Credit Education page MyFico.com.