Credit scores. They may sound a little boring… But you should get to know what goes into a credit score because landlords, employers and banks look at them. So a bad score can keep you from not only getting a loan, but also keep you from getting a great job or a great home.
Getting to know how the system works will help you manage your score and prevent your life from getting derailed. Financial institutions share all of your credit information with the three main US credit bureaus: Experian, TransUnion and Equifax. Everything from balances, credit available to late payments is shared with the credit bureaus.
The first thing you need to do is to get your free credit report once a year from AnnualCreditReport.com. The credit bureaus are notorious for getting data wrong. Sometimes someone else’s transactions can appear on your report. Fix the mistakes right away!
Each credit bureau has a different way of calculating your credit score but the logic is the same for all of them: The higher the score, the better. The most commonly used score is the FICO score. It ranges from 300 to 850. Anything over 660 is considered good.
So here are some strategies for helping you keep your score as high as possible.
- Never miss a credit card or loan payment. Period. Too many bad things can happen if you do. Try setting up an auto pay to cover at least the minimum payment so this never happens.
- Don’t cancel your inactive credit cards. Credit bureaus love it when you have tons of credit available. If you cancel your card and reduce your available credit, credit bureaus won’t know why. They may assume that a bank cancelled your card. All they know is your available credit dropped, and your score will go down. So keep your card open and use it only once in a while.
- Use less of your available credit (30% or lower is best). The crazy part of this means that if you buy an airline ticket one month and max your card, your credit score may suffer. So a tip: Pay down your big purchases before your statement is generated, so you can lower your balance before it’s reported to the credit bureaus. Or another strategy is to auto-pay your credit card once a week. If you make three payments before bill goes out, your month-end balance will be lower and you’ll look better to the credit agencies.
- Get different kinds of credit. Even just getting a store card or gas card could improve your credit score because those cards are seen differently to credit cards. The more types of credit you have, the better.
- But… only apply for credit that you need. Too many inquiries into your credit and any rejected credit applications will hurt your score. And if you’re shopping around for credit, do it quickly. Most credit bureaus know you’ll shop around for mortgages or student loans, and will leave your score alone for around 30 days while inquiries are made into your credit score. But if you delay, those multiple enquiries may hit your score, thus risking the credit you’re applying for.
- Consolidate your credit card loans. Companies like Prosper will take your higher interest loans and pool them into a single, lower cost loan. To the credit agencies you look good because they look more favorably on these installment loans. And you’ll have freed up credit on your credit cards. And you’ll also saved interest charges with the lower rates. Win-win! Just make sure you don’t charge up those cards again!
- Finally, if you have a terrible credit score, try to get a secured credit card. It means saving some money and giving it to your bank to be used as collateral against a credit card. Banks are much more willing to give secured credit cards than unsecured cards. Your credit report will show that a bank gave you credit even with a terrible score. That will quickly improve your credit score.
In the end, the best action you can take is to pay your bills on time each and every month. Time will heal all credit wounds. But also make sure you know the rules of the credit score game, because your score can affect everything from buying a house to getting a job. It's a big deal.