Today, whether your goal is to buy a home or a car, rent an apartment, apply for a job, obtain a business loan, receive a lower insurance rate or simply get your utilities turned on in your name, you can expect the person or company evaluating your application to ask for permission to review your credit.
Looking at your credit history is simply an easy and convenient tool for decision-makers to gauge your ability to honor and fulfill the terms of a contract or agreement you may make with them.
The most popular credit scoring system was pioneered by the Fair, Isaac and Company (FICO). It uses proprietary formulas to convert a consumer’s credit history into a three-digit number ranging from 300 to 850, with a higher number indicating a more creditworthy borrower.
Although people typically talk about their credit score, you really have multiple credit scores because each of three major credit bureaus — Equifax, Experian and TransUnion — compiles its own credit report and score based on your credit history. Scores are usually updated monthly but the frequency may be greater if inquiries are made on your credit.
You can access your credit reports for free from each bureau once a year by visiting annualcreditreport.com and requesting copies. To see your scores, however, you’ll pay a small fee.
Now, let’s get into how you can improve your credit score, knowing that every little point could mean the difference between a thumbs up and a thumbs down.
Know Your Scores
If you don’t know what others are looking at, you need to find out. As noted above, you have that opportunity by requesting a free credit report from each of the credit bureaus once a year. Review the report from each bureau for any errors or discrepancies, which, when corrected, can improve your credit profile.
Don’t Skip or Be Late on Payments
This is just a no-brainer. Skipping or being tardy on your payments will drag down your score. Making payments on time makes up 35 percent of your FICO score. Set up payment reminders so you’ll always make your payments on time.
Don’t Create More Debt
Maxing out your credit cards just because you can is a sure-fire way to sink your scores. Generally, a good credit utilization rate is less than 30 percent, meaning you’re using no more than 30 percent of the total credit available to you. Just because you have credit, doesn’t mean you should take it to the limit. By maintaining a healthy amount of available credit, you’re signaling to other potential lenders that you manage your finances well and pose a minimal risk of default.
Don’t Rush to Close Your Accounts
As emotionally and physically satisfying as it might feel to cut up your credit cards to rein in a shopping problem or help you manage your debt load, such a drastic action isn’t without consequences. Indeed, closing a credit card account with a high credit limit could hurt your credit score, particularly if you have high balances on other cards or loans.
You may be familiar with the saying, “Keep your powder dry,” meaning you should remain cautious and ready for a possible emergency. Well, a credit card with a high limit that you’ve had for a long time is your “dry powder.
Don’t Accept Every Card Offer You Receive
Any time you apply for a new credit card, the financial institution issuing the card will make a hard credit inquiry, which may negatively impact your FICO score. A pattern of several hard inquiries over a relatively brief period may indicate to a potential lender you may be desperate for a loan.
Invest in an Installment Loan
If you don’t have a credit score, or have only a minimal credit history, taking out a small personal loan and paying it back in full and on time can be a good strategy to show the credit bureaus you are taking responsible steps to build credit.
Credit Scores and Reverse Mortgages
If you’re 62 or older and your goal is to leverage your considerable home equity by obtaining a reverse mortgage, you should know that a reverse mortgage lender does not require a minimum qualifying credit score. Yet, the lender still takes your credit history into account primarily because it wants to be confident that you will be able to pay your property taxes and homeowners insurance and handle your home’s ongoing maintenance expenses, all conditions of a reverse mortgage. If your credit history is problematic, you may still be eligible for a reverse mortgage. You would likely be required to establish a Life Expectancy Set Aside or LESA to ensure your loan obligations would be met.
So, bottom line, there are several ways to start improving your credit now. And the sooner you begin, the sooner you’ll improve your ability to obtain that home loan, car, job or low insurance rate you’ve been seeking to improve your lifestyle and retirement.
We hope this article has given you some help with things to think about. Of course, every situation is different. This information is intended to be general and educational in nature, and should not be construed as financial advice.