Your credit score is a very important number that lenders use in order to determine whether or not to extend credit to you, and what the interest rate and terms of the credit or loan are. The lower your score, the less likely you will be approved for loans. If you are approved, you may have to pay a higher interest rate. That's why it's in your best interest to have the highest score possible if you plan to open a credit card, get a personal or car loan or apply for a mortgage to buy a home.
Understanding how your credit score works and is calculated is the first step to raising your score. Your credit score is broken down into five categories:
- Payment History – 35%
- Total Amounts Owed – 30%
- Length of Credit History – 15%
- New Credit – 10%
- Type of Credit in Use – 10%
Each one carries a different amount of weight in your credit score calculation. Adopting the right credit and financial habits can help make a positive difference in your score. With that in mind, here are five things to focus on if you're hoping to boost your credit score.
Make Your Payments on Time
The single most important thing you can do to keep your score high or improve upon your score is to make your payments on time. Payment history is the largest factor that is used to determine your credit score. Payments that are 30 days or more past due will show up on your credit report and negatively impact your score. These negative marks generally stay on your report for seven years.
To make paying on time easier, consider setting up automatic payments from your checking account. If you're not comfortable with automating payments, you can also set up payment reminders with your billers or through your bank account to alert you when a payment due date is on the horizon.
Keep Your Total Debt Load Under Control
With the second-largest factor of your credit score being the total amount you owe, it is important to keep borrowing under control. If you currently have a significant amount of outstanding debt, your priority should be to stop borrowing and work toward lowering the balance.
This isn’t always easy, but the only way to improve your debt situation is to stop borrowing or using credit cards and continue to make timely payments that reduce your balance.
In addition, you want to consider how much of your available credit is utilized. For example, having many credit cards that are maxed out, or very close to their limits will negatively impact your score. Two credit cards with a $5,000 limit and a $1,000 balance on each will look much better than a single card with a $2,500 limit and a $2,000 balance.
To better keep track of your balances and spending, use alerts to notify you of new credit card or debit card purchases. You can also set up a separate alert to let you know when your credit card balance reaches a certain amount. Consider scheduling weekly or biweekly payments to your cards to shave off a little interest and nibble away at your balance faster.
Keep Old Accounts Open
Length of credit history is another important credit score factor, so it can be to your advantage to keep older accounts in good standing open. While you want to keep the total number of accounts manageable, sometimes it can hurt your score more to close an old account than to keep it open, even if that means you have more open accounts. Closing an old account when you have a remaining balance can also hurt your score since it directly affects your credit utilization.
Use Different Types of Credit
A smaller part of your score is based on the types of credit you're using at any given time. Lenders like to see that you can be responsible for revolving credit, meaning credit cards, as well as loans. If you don't have a credit card yet, you may want to consider opening one. And if you don't have any loans on your credit report, you could take out a small personal loan to help build credit.
Be Careful When Opening New Accounts
While new credit is the least important factor in your score, it is still an important issue to consider. When you are shopping for a new loan or credit card, do your shopping in a relatively short amount of time. You don’t want to have your report show that you are constantly looking for credit.
You also don’t want to open credit accounts you don’t intend to use. It may be tempting to get that additional 10% off when you open that new retail store card but the little bit of money you save may be insignificant when multiple new accounts such as these actually lower your credit score. Not to mention, store cards can often carry higher annual percentage rates compared to traditional credit cards. If you don't pay the balance off right away, the higher APR can negate any savings you received by opening the account.