A credit score is a 3-digit number between 300 and 850, generated by a mathematical algorithm (a mostly secret formula) based on information in your credit report, as compared to information on tens of millions of other people. Like it or not, the resulting number is said to be a highly accurate prediction of how likely you are to pay your bills.
If it sounds boring and unimportant, you couldn’t be more wrong. Credit scores are used extensively these days. If you rent an apartment, get braces, buy cell phone service, apply for a job, or call to get utilities connected, there’s a good chance your report and score will be critiqued to qualify.
If you have a credit card, the bank or issuer of that account is likely to regularly look at your credit score and payment history to decide whether to decrease your credit limit or charge you a higher interest rate.
The higher your score, the better you look to lenders. People with the highest scores get the lowest interest rates. And they’re getting the jobs.
Know Your Score
You know you can get our credit reports for free at AnnualCreditReport.com. Now you can get your credit scores for free, too. Check your credit scores anytime, anywhere, and never pay for them at CreditKarma.com. You will need to create a simple, password-protected account. No credit card required. Plan to get hit up to buy all kinds of things and apply for all kinds of new credit. Just be strong, get your free score if that’s what you’re there to do, and move on.
How to Improve Your Credit Scores
Yes, credit scores plural and you have at least one, whether you know it or not. In fact, current estimates are that you have at least 57 credit scores out there—but only a handful of them are important to anyone.
That being said, most lenders look to your FICO Score in their decision-making process. But even that is complicated because CRAs (credit reporting agency) now have their own branded scores, which are “based on the FICO model”. So you might see that you have an Experian FICO Score, for example.
If you want to look to the gold standard of credit scores, you want to track your FICO score. It is available to you, for a few bucks, at MyFico.com.
Pay your bills on time
Making your credit payments on time is one of the most important contributing factors to your credit scores. Delinquent payments have a major negative impact. If you have missed payments, get current and stay current. The longer you pay your bills on time, the better your credit score. Be aware, however, that paying off a collection account or bringing an account current will not remove that previously negative item from your credit report. But the change in credit behavior will be clearly apparent to anyone looking at your credit history.
Keep balances low on “revolving credit”
Using more than 30 percent of your available credit on your credit cards brings down your credit score. This applies to individual accounts and when you add up all of your available credit and compare that total to how much you are using at any given day during the billing cycle. This may be easier said than done. Just know that reducing the amount that you owe may be a far more satisfying and immediate achievement than improving your credit score. The first thing you need to do is stop using your credit cards.
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Pay off debt rather than moving it around
The most effective way to improve your credit score is by paying down your revolving credit. Getting your balances down to $0 will send your score soaring. Just know that paying off your credit card balances with the proceeds from HEL (home equity loan) is not really paying off any debt at all. That is an act of moving the debt from your unsecured credit cards to a mortgage that is secured by the value of your home.
Don’t close unused credit cards
Closing accounts might sound like a great short-term strategy to raise your score, but it’s not if you are carrying revolving credit card debt. This will close the gap between your outstanding debt (the amount of credit you are using) and the total amount available. Instead, use a clear strategy to close accounts, but only as it will not impact the gap between what you owe and the amount of credit available.
Don’t open new accounts
More credit might seem wise in order to increase your available credit ratio, but it will be seen as a negative to your score. New or “young,” accounts are not useful in credit scoring because they dilute your average account age. Unless it’s a dire emergency, do not open new credit accounts.
Work on longevity
Make sure you maintain your oldest accounts. A great deal of weight is given to longevity, so the oldest account you have is the most valuable.
Stick with it
As with a lot of things in life, time is the best “healer.” Do the right thing by managing your finances responsibly and your credit score will take care of itself.
If you are having trouble making ends meet, contact your creditors, or see a legitimate credit counselor. This won’t rebuild your credit score immediately, but if you can begin to manage your credit and pay on time, your score should increase over time. And seeking assistance from a credit counseling service will not hurt your credit scores. But beware. There are lots of shysters out there masquerading as negotiators, settlers, and credit counselors.
You can find a legitimate, certified credit counselor at NFCC.org. The National Federation for Credit Counselors is the nation’s first and largest nonprofit dedicated to improving people’s financial well-being.
Go to NFCC.org to get immediate help online, or call (800) 338-2227 right now to be connected with a counselor near you. NFCC offers credit/debt counseling, bankruptcy counseling, housing counseling, reverse mortgage counseling, student loan debt counseling, and debt management plans. They’ll help you improve your credit score.
NFCC is legit. In fact, NFCC is the only credit counseling organization I recommend and endorse. They’ve been around for many years and have earned the highest reputation. NFCC is a wonderful organization you can trust that has come to the rescue of thousands of my readers over the years. They’re ready to help you, too!