Everyone knows the basic human necessities: food, clothing, shelter, and a good credit score. Slight exaggeration aside, the fact remains that a bad credit score can be very prohibitive to your life. Conversely, an excellent credit score gives you a lot of freedom. Not only does it make it easy to be approved for a loan and get a great rate, but it also makes you more attractive to prospective employers; even car insurance companies check credit and factor it into their underwriting. Whether you’re suffering from bad credit or no credit, the good news is that you hold the power in your very own hands to get a top tier score.
What is a Good Credit Score?
The very top tier generally starts around 750, however, scores of 700 or greater are generally considered to be indicative of good money management (from around 700 to around 750 would be the second tier). Below the 700 mark, you start getting into the “not necessarily declined, but not the best rate” territory. Anything below 650 or so is no good.
Components of Your Credit Score
To understand how to improve your score, it helps to see what goes into it. The exact calculation used by the three reporting agencies is proprietary information, but the breakdown of the components is as follows (from MyFICO.com):
How to Get There
Before you can begin repairing and rebuilding, you first need to know what you’re working with. Request a free credit report to see where you are, then get to work on achieving credit score brilliance.
1) Check for Errors. If you see any, call the lender and dispute it. You could even have it removed entirely; it has been known to happen (speaking from personal experience!)
2) Set up Automatic Payments. For those you can’t set up automatically or need to make more than a minimum payment, set up payment reminders in your calendar (also, some banks offer payment reminders via their online banking!)
3) Stop the Bleeding. Don’t buy anything unless you can pay for it right now with cash. Shred (but don’t necessarily close, see step 6) all of your credit cards except one for emergencies.
4) Reduce Your Debt. Get on a debt reduction plan; see my previous article, “6 More Tips to Help You Eliminate Debt for Good!”
5) Request Higher Limits. Debt utilization (the percentage of your balance over your total limit) is part of the “Amounts Owed” section. You want this to be no more than 40%, but preferably under 20%. Obviously the best way to lower this percentage is to pay down the balances. In the meantime, however, increasing the limit also lowers the utilization. Only do this if you can do it responsibly, it is not an invitation to spend more!!!
6) Keep Your Oldest Cards Open. Closing old accounts may lower your score as it reduces the overall average length of your credit history.
7) Have a Good Mix. If all you have is credit cards, consider opening an installment loan (examples of installment loans are personal loans, auto loans, mortgages, etc.) Your score will improve faster once you prove you can be responsible with both revolving debt and installment debt.
8) If You’re Starting from Scratch: Open a credit card (find one with no fees and preferably some rewards!) and use it responsibly. Make purchases that you can afford to pay off right after you get your bill. Pay off your total balance every month and never be late.
Did I mention to never be late?? It is the single most important thing you can do for your credit. Do whatever it takes to force yourself to pay all of your bills on time. By following this action plan you’ll be enjoying the view from the top tier before long.