Your credit score impacts nearly every aspect of your financial life, including the interest rates you pay on things like a mortgage, car loan, insurance, and it can even impact your job these days.
Your credit score is part of how lenders decide how much money to loan you and how much interest to charge for it. They use your credit score, along with other factors, to determine the likelihood that you will be able to pay them back — and on time.
So here’s how you can formulate a plan to raise your creditworthiness, which will not only save you money, but also open up more opportunities for you down the road.
First steps: Get your credit report — and then your credit score
Each year, individuals are entitled to one free copy of their credit report from the three major credit reporting agencies: Equifax, Experian and TransUnion. Review these reports for any potential errors, such as late payments you actually paid on time or incorrectly listed credit limits. Ensuring that this information is accurate can help you get the fairest shake possible from a bank considering you for a new credit card or loan.
Read more: 7 easy ways to cut monthly bills
However, these free credit reports do not include your credit score, including the most commonly cited FICO score. To obtain that number, you may have to pay one of the agencies — or in the best case, your current bank might provide it to you for free. Knowing your score gives you an idea of your creditworthiness. And knowing what goes into that score gives you an idea of what you can do to improve it. Before getting your official FICO score, you can get your non-FICO score for free to get an idea of what your score is. Here’s more on how to do that.
Read more: How to fix errors on a credit report
Understand your credit score
Every person’s credit score depends on the particular risks they pose to a lender. One borrower might have a maxed-out card, but a history of timely and large payments. Another borrower might have a small balance, but also a brief credit history and a glaring error that complicates the borrower’s trustworthiness to a bank. As the credit reporting agency Experian puts it, ‘One change actually affects many items on the credit report. It is impossible to provide a completely accurate assessment of how one specific action will affect a person’s credit score.’
It is possible, however, to know pretty much exactly what goes into your credit score. The factors listed below comprise the total number of your FICO score, which generally ranges from 300 to 850 (the higher, the better) — and the percentages represent how much each one influences it.
35%: Your payment history
30%: Amounts owed
15%: The length of your credit history
10%: New credit
10%: Mix of credit
As you can see, your payment history and how much debt you owe are the strongest influences on your score. It’s vital to base a credit-building strategy on these two factors.
If you know the details of your credit report and your score, you can formulate a plan to become a better borrower. For example, if you notice that you’ve made multiple late payments in the past and your score has taken a hit because of it, try to become more timely, by setting automatic payments or calendar reminders around due dates.
Developing responsible habits is the true ‘cure-all’ for raising your credit score. Here are some specific suggestions to help boost your score as much as possible in the new year:
- Don’t let balances linger if you can help it. If you can afford to pay off a balance, do it. And if you can’t afford to pay it in totality, pay off as much as you can, as often as you can. Banks want to ensure you can pay off debt if they’re considering you for a credit increase, a new card or a loan. And since the amount you owe makes up such a large amount of your credit score, it’s best to reduce that dollar figure as much as possible!
- Make multiple payments a month. As US News notes, your credit report is a ‘snapshot’ of your finances at any given moment — not just the first or the end of the month. If you make multiple payments on a balance per month, you’re more likely to have a lower balance each time the camera flashes. And since interest accrues daily on credit card debt, you actually do yourself a favor by, say, making two payments of $100 in a month instead of one payment of $200 at the end of it.
- Open a new card! And use it responsibly. A new card is a building block to a more thorough credit history, and if you have any debt at all, it also decreases your utilization rate — the percentage of credit card debt to your cumulative credit limit — right off the bat. But as myFICO advises, ‘Don’t open a number of new credit cards that you don’t need, just to increase your available credit.’ Get the card, and then use it — responsibly. Don’t go on a spending splurge if you can help it, and if you do need one for a big purchase, then try to have a plan in place to pay off the balance aggressively.
MyFICO has even more tips here. The one you should follow closest? ”Fixing’ a credit score is more about fixing errors in your credit history’ than anything else. Take stock of what you’re good at, and keep doing it! If there are areas where you need to improve, address them — and be patient.