Credit Score

Tips To Improve Your Credit Score

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We’ve all seen those “improve your credit score quick” articles however to effectively improve your credit score, it takes time and diligence.  In the real world, our credit score is the gatekeeper between ourselves and getting our first car or house.  While an excellent credit score starts at 740 and goes up to 850, most Americans fall somewhere lower.  The overall landscape of where people fall looks like this:

Credit Score Rating Ranges

Rating Range
Excellent Credit 740-850
Good Credit 680-740
Acceptable Credit 620-680
Subprime Credit 550-620
Poor Credit 300-550

Unfortunately, the further away we move from an excellent credit score, the higher interest rates get and fewer institutions are willing to extend us credit.  As such, it is important to maintain a high credit score.  Here are a few tips that will help you get there by giving you a better understanding of how they influence your credit score.

1) Credit Card Utilization – This is how much of your available credit you are using.  Say you have $100,000 in available credit and you charge $5,000 to your credit card.  You would be at a 5% utilization rate.  This is the edge of where you want to be.  Generally 5% or lower  is the sweet spot.  Your available credit is made up of all of your credit card limits combined.  Likewise with the utilization, all of your credit card balances combined.  By reducing your credit card balances and watching what you charge, you should be able to keep this number in check and be well on your way to a good credit score.  One way I’ve found helpful is to watch those recurring charges.  Keep those on your debit card and eliminate unnecessary recurring fees all together.

2) On Time Payments – Making on time payments have a huge impact on your credit score.  Even one missed payment can drag you down significantly.  I personally like to pay off my bills in full each month.  However, if you are going through hard times, it is best to at least pay the minimum payment to hold yourself over until you are able to pay more of the bill down.  Many experts would say that maintaining on time payments is the absolute best way to reach and keep a high credit score, so this should be your priority.  My best advice is to not charge what you cannot pay off next month.  Also, we’ve all heard that it is good to use your credit card.  It builds credit because it is showing that you are making payments each month and building up a history.  I would argue that if you cannot pay it, don’t charge it.  Paying off a statement in full will still show up and build a history.  Also, it is better to have no debt than dig a hole trying to build up a history that in the end may end up being a larger hole than you expected.

3) Ave. Age of Open Accounts – One of the pieces of advice that I would give is to open your first credit cards as soon as possible.  I opened my first two my freshman year of college and I still have them today.  Of course you should do so responsibly.  As a young adult, it is very easy to charge things away, piling up a mountain of debt before you’ve developed some real sense of what has just happened.  On the flip side, opening a credit card early is important because part of your credit score is made up of the average age of all of your credit lines.  Ideally, the average age of your lines should be 8 years or more.  Also, remember that this is the average age of all credit lines so opening a card today will definitely reduce the average age.  Front load yourself with credit cards (responsibly, of course) and do not close your oldest cards.  This will give your average a heavy bias, skewed towards the older cards, for instances when you need to open a new line or see that once in a lifetime amazingly high cash back credit card.

4) Hard Credit Inquiries – Every time your credit is pulled, your credit score gets dinged.  It usually isn’t by a lot but do this repeatedly and it adds up.  This signifies risk to the creditors.  If you’re shopping for a house, etc, it isn’t too big a deal but if you are opening 30 credit cards, its definitely time to reassess.  Try to limit doing things that require a credit pull.  This includes things like requesting a credit line increase, opening a new cell phone plan and applying for new credit cards or store cards.

5) Find and Monitor Your Credit Score – One of the most basic tips is to first know your credit score and then second, monitor it.  There are a variety of tools out there that do this for free.  My favorite tool for keeping tabs on my credit score is Credit Sesame.  They regularly update your score, keep track of it over time and provide insights into where you are in the factors that make up your credit score.  They also closely monitor any changes to your credit score and notify you when things change or there is potential fraud.  Best of all, it is Free.  Check them out by clicking here.

These are great places to start on your journey to a great credit score, however the ultimate key to a good credit score is excellent financial management.  Do that and a great credit score will naturally follow.

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