This is a guest blog post by Christine Yaged, co-founding partner and Chief Product Officer of FinanceBuzz, an informational website that provides up-to-date simple tips, free advice, and money-saving offers so it’s easy to understand how you can grow your wealth and pay your bills.
If you thought getting in trouble for bad grades ended with high school, think again. Your credit score is essentially an adult report card about your spending habits. It governs what loans you qualify for and how high your interest rates will be.
The good news is that credit scores are not static. If your credit score is lower than you would like, it can be improved. And if that is your resolution for the New Year, here are 9 tips that can help.
1. Don’t wait
Most of the time, people only worry about their credit when making a big financial purchase like buying a new home. If you wait until then, you may not have time to make any improvement.
Don't wait. Start improving your credit score as soon as possible. It’s much easier to maintain a good score than to try to raise a low score in time to qualify for a mortgage.
2. Check your credit report
Before changing your credit score, you need to know what it is. Your first step should be to order a free credit report.
As long as you know your social security number, you can access your credit report online. While it won't show your credit score, it will show your payment history and information pertaining to your various credit accounts.
3. Check your FICO score
When people talk about their credit scores, a FICO score is usually what they mean. These scores are calculated on a scale of 300-850 and the scores break down like this:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very Good
- 800-850: Excellent
Excellent credit is somewhat difficult to attain, requiring not only exceptional payment histories, but also a certain quantity of credit history.
Don’t worry though. A credit score in the “very good” range will get you the mortgage you have been longing for, and a credit score in the high 700s is attainable for most people.
4. Pay bills on time
Now that you are committed to raising your credit score, you will need to start paying your bills on time.
A steady, punctual payment history is one of the biggest contributors to your overall credit score. Be patient though. It can take a few months before your new payment habits are reflected in your credit score.
5. Be smart about late payments
If you find yourself unable to pay all of your bills on time, try to keep late payments to one month.
It’s better to be one month late on two bills than two months late on one bill. A lot of companies don’t report late payments to credit agencies until they reach the second month, and a payment that is only a few days late shouldn’t show up on your credit report at all.
6. Keep credit utilization low
Your payment history is the largest factor contributing to your credit score, and how much you owe is second.
That said, how much you owe doesn't necessarily correlate to better or worse credit scores. Instead, the most important aspect about how much money you owe is your “debt utilization ratio”, or how much money you owe in relation to what your total credit limit is. For example, if you have two credit cards with $500 limits, and you routinely spend $250 a month on each card, your utilization rate is a solid 50 percent.
You can improve your credit score by changing your spending habits and lowering your debt utilization ratio to below 30 percent.
7. Be careful with new lines of credit
Opening new credit cards can negatively impact your score as new lines of credit can be deemed less “trustworthy.”
This shouldn’t stop you from opening new lines of credit when needed, but be aware that your score may decrease temporarily after a new card is opened or a new loan is taken out. Unless this becomes a habit, you should see these negative effects go away as your new credit ages.
8. Don’t max out your credit cards
On a related note, try not to reach the spending limit on your credit cards. While your overall debt utilization ratio matters more, it’s still detrimental to your credit score to max out your credit cards. If you have three cards with limits of $1,000 each, it’s better to put expenses on each one than to max out one and leave the other two unused.
This also adds in another layer of protection from potentially falling into debt. By staying on top of your payments and not maxing out your credit cards, your finances and credit will be in a better overall financial position - something that people who have fallen behind on multiple loans struggle with improving.
9. Automate when you can
If you are struggling to maintain punctual payments, it may be useful to set up automatic payments wherever possible.
Many companies will let you schedule monthly payments, which will help keep you on track. You will be less likely to miss a payment, and budgeting will be easier.
On the House blog posts are meant to provide general information on various housing-related issues, research and programs. We are not liable for any errors or inaccuracies in the information provided by blog sources. Furthermore, this blog is not legal advice and should not be used as a substitute for legal advice from a licensed professional attorney.