How to Manage your Credit Score

A key building block of managing your finances is to have a strong credit score. As I shared in my recent article Understanding Your Credit Score, credit scores impact your ability to borrow money such as a car loan, credit card or mortgage. In addition, these scores impact the cost (i.e., the interest rate) of any loans you do get. They can also influence other aspects of your life such as the cost you pay for insurance or even the ability to get a job offer. Given all the ways that credit scores can affect your finances and your life in general, it’s important to maximize your credit score.

Start by getting an accurate baseline of your current score

You can access your score at AnnualCreditReport.com. This is a free site that enables you to get your scores cost free once a year from each of the three major credit agencies as mandated by law.

In addition to understanding your current score, it’s important that you check your credit score periodically as the credit bureaus frequently have incorrect information. If you find a mistake, the credit bureaus each have their own process where you can reach out to them and request that the mistake be rectified.

What if you don’t have a credit score?

If you don’t have a credit score, it’s because you don’t have any history that the credit bureaus can use to calculate a score for you.

One simple way to start building your credit history is to get added as an authorized user on somebody else’s credit card, for example your parents. “Adding yourself as an authorized user on someone else’s credit card could help to build and establish your credit” (from Can being an authorized user build your credit? by Chase Bank) as the payment history on that card is used to calculate scores for all users. However, be careful whose account you get added to as an authorized user as you want to ensure that the way that account is used helps build a strong credit score.

Use any credit you have responsibly to improve your credit score

Credit bureaus use a number of data points to calculate a credit score. While you don’t control all of those data points, using your credit responsibly can cover the majority of the important ones. Here’s what I mean by “responsibly” using your credit (data on share of credit scores taken from How to build credit and achieve a good credit score by CNBC):

• Pay your bills on time: Payment history is the most important factor, accounting for 35%, in calculating your credit score. This factor is so important as it’s an indicator to lenders of the probability that you will pay back the money you borrowed. Naturally, lenders want to be assured that they will get their money back from you. Missing or making late payments will meaningfully decrease your credit score as lenders view this as a demonstration that you are a riskier person to whom to lend. To ensure that you’re not in this situation, set up automatic payments on your accounts. Nowadays, most if not all credit accounts have that feature. You should also do this for your rent, utilities and any other bills as payment history on these are also used to determine your credit score
• Keep credit card utilization to less than 30% of your total limit: Lenders want your utilization score, which is the outstanding amount on all your credit cards as a percent of the total credit limits across accounts, to be 30% or less. The reason for this is that the probability of a person defaulting on their debt increases as they get closer to full utilization. The way I manage my utilization is that, if I get close to 30% across my credit cards, I make an additional payment to bring my outstanding debt level down. Credit utilization rate accounts for about 30% of your credit score so this is almost as important as your payment history
• Don’t cancel your older credit accounts: 15% of your credit score is determined by the length of your credit history. Lenders want to see a longer history as it gives them more data to determine how responsible you are with credit usage. By keeping your older credit accounts open, you maximize the weighted average length of your credit which increases your credit score
• Limit the number of new accounts you sign up for in any given time period: New account inquiries temporarily cause decreases in your credit score. That decrease lasts for a few months so spread out the new accounts you apply for over multiple months. This means that you need to be able to say “NO” to the constant stream of promotional offers you get for signing up to new credit cards, store cards or the Buy Now Pay Later offers which are increasingly being marketed in today’s economy

By following the simple rules listed above, you should gradually see increases in your credit score. Gradually is the key word here as lenders want to see consistently responsible usage of your credit.

This completes today’s post on how to manage your credit score. The practical steps you can start taking from today’s post are:

• Check your score: Once a year, check your credit score. Use AnnualCreditReport.com
• Ensure your credit reports are accurate: If there are any inaccuracies, contact the relevant credit bureau to fix any issues
• Responsibly use your credit to increase your score: There are many ways to improve your score with responsible credit management, but the key ones are outlined in the article above

Thank you again for joining me on my journey to build financial literacy for young adults and their families. If you are interested in reading more of my posts, please access my author page (https://vocal.media/authors/sudhir-sahay) where you can see all the posts I’ve published. In addition, if you think any of your friends and family can benefit from this content, please share my profile page with them. If you have any questions on today’s post of if there are any topics you’re interested in my broaching in future posts, please let me know. I can be reached at [email protected].