We often hear expressions like "age is just a number", or "a scale is just a number". Well, while in theory, your credit score is just a number, that number can be the deal breaker in some of the most important decisions others make about us. Want to buy a house? Your credit score will dictate what kind of rate you'll get on your mortgage. Want to lease a car? Your credit score will determine the kind of financing you get. Want a credit card with valuable rewards? Your credit score is used to determine a lot about that, from the limit you will get (or whether you'll get the card at all) to the interest rate in your payments.
So, what can you do to make your credit score better? Here are some simple steps:
1. Check Your Credit Score
You can use free credit monitoring, which, in fact, many banks offer as part of their services, or the free credit report you're entitled to every year from the three major credit bureaus (Experian, TransUnion, and Equifax). You can check the current state of your credit at AnnualCreditReport.com. If something isn't accurate in your report, you can dispute it and get it fixed.
2. Let Your Accounts Grow Old
One of the factors that make up your credit score is the age of your credit history. The younger it is, the lower your credit score will be, as it shows lenders a shorter timeframe during which you've been responsible with your credit, if that's the case. When paying down debt, lots of people make the mistake of closing their credit cards once they pay them off. That can actually hurt your credit score. If having them on you is a trigger for overspending, leave it at home - but don't close the account.
3. Bad Credit? Prove Yourself with a Secured Credit Card
Secured credit cards are a great tool for those new to the country, who need to build credit; and those who've gone through a tough time and are rebuilding their credit. Here's how a secured credit card works: you make a deposit in cash to the bank ($500 is a popular amount to start with) and the bank opens a line of credit for you, for that same amount, in the form of a credit card. Start small - maybe put your music or TV streaming subscription on that card and pay it off each month (being a fixed amount, it'll be easy to plan for in your monthly budget). This will allow you to show the bank that you can be responsible with credit, and over time allow you to build your way up to an unsecured credit card with no cash deposit required.
4. Don't Be a Serial Applicant
Applications for financial services such as credit cards, car leases, personal loans, mortgages, etc., involves what is called a "hard inquiry" into your credit. What that means is that whoever receives your application will request an official copy of your credit report to one of the major bureaus. Applying for multiple lines of credit in a short period of time could signal to financial institutions that you're trying to stretch yourself too thin - and make you look unreliable.
5. Watch Your Credit Utilization Ratio
The amount of money you spend on credit is also important. Your credit utilization ratio is the percentage of your credit available that you actually use. When you max out your cards or go close to doing so, that signals to banks that your spending habits are not disciplined - and that you might be once again stretching yourself too thin. Depending on your income, it might also signal to banks that you might be not capable of paying off your debts.
6. Make Your Payments on Time
Worried about missing payment due dates? Automatic payments to the rescue! Set your due dates around your paychecks as much as possible, and then schedule your payments to come out of your account automatically. That'll help a double purpose: one, show credit bureaus that you pay your bills on time, therefore can be considered responsible with your credit; and two, you don't have money in your account that is unaccounted for and you might spend on something you don't need.
7. Become an Authorized User
Someone with good credit can give you a hand by making you an authorized user on one of their credit cards. This has to be someone who is very responsible with their finances and is willing to list you as an authorized user on their card. This account will show up on your credit report and give you an extra account you can show your name to the credit bureaus. You don't even have to use the card for this to work.
Even if you try all these strategies at once, keep in mind that they will show results over time, not overnight. Using credit responsibly can open all sorts of possibilities for you. What other credit-boosting strategies do you know?