When it comes to personal finances, your credit score is the single most important number you should know. A strong credit score can open up doors to loans and credit cards that offer better terms and rates than you would receive with a low score. There’s no better time than the new year to take note of simple steps you can take to improve your credit score!
While the unexpected can often derail our financial goals, a strong credit score can be easy to build if you exercise financial discipline. If you don’t make decisions that cause you to get overextended, building an excellent credit history can be done simply by making responsible financial decisions.
A credit score of 750 or higher is considered excellent but having a rating above 700 is still considered good. Typically, you don’t want your rating to fall below 700. There are five main factors that determine a credit score. Some have a larger impact than others, but each area is examined to determine a person’s ability to repay a loan.
- Payment history — Consistently paying bills on time is the quickest way to increase your credit score.
- Credit utilization —Maxing out your credit cards or consistently carrying large balances will negatively impact your credit score.
- Length of credit history — The longer you have held an open credit account will positively impact your credit score.
- Number of accounts or inquiries — Having too many credit inquiries can cause your score to drop. Only apply for what you need.
- Credit mix — Having a variety of credit accounts — mortgage, auto loan, student loan, credit cards — shows you’re able to handle different types of loans and can increase your score.
Tips for Improving Your Credit Score
Building and maintaining an excellent credit score requires organization and willpower to live within your means. Following are steps you can take to get your score moving in the right direction.
- Pay bills on time — Payment history accounts for 35% of your credit score. Set up automatic payments on your accounts to ensure you don’t miss a payment and get into a habit of paying bills on time.
- Make multiple payments each month — Credit utilization accounts for 30% of your credit score. If your balances are too high on certain accounts, consider making multiple small payments each month to reduce the amount of credit you’re using.
- Keep credit card balances low — Just because you have a $20,000 limit on a credit card doesn’t mean you should use it all. Try to keep your credit utilization below 30%. That will tell lenders you are a safe borrower.
- Check your credit report each year — Visit www.annualcreditreport.com at least once a year to request your credit report and dispute any errors that may be pulling your score down.