Five Ways to Build a Healthy Credit Score
It's easier than you think to get a strong FICO score
Your three-digit credit score is an important number: Lenders use it to determine if you qualify for mortgage, auto, student and personal loans and at what interest rate. You’ll need a strong credit score, too, to qualify for the best credit cards.
How strong of a score do you need? Most lenders consider a FICO credit score of 740 or higher to be excellent. And if your score is lower than 640? Many lenders won’t approve you for a loan or credit card.
If your score is low, though, there is hope: You can boost your credit score over time by changing your financial habits. And the best news? Increasing your credit score isn’t complicated.
Here are the five key tips for building a healthy credit score:
Pay your bills on time: Certain payments are reported to the three national credit bureaus of Experian, Equifax and TransUnion, including credit card, student loan, mortgage and auto loan payments. Every time you make one of these payments on time, your credit score improves. When you make a payment 30 days or more past its due date? Your credit score will plummet, often by 100 points or more.
Cut down your credit card debt: It’s important, too, to keep your credit card debt low. The lower your credit card debt, the lower your credit-utilization ratio. This ratio measures how much of your available credit you are using. If you are using less of your credit, your credit score will increase. If you are using a lot of your available credit? Your credit score will fall.
Don’t close paid-off credit card accounts: You might think it makes sense to close a credit card account that you’ve paid off and have no intention of using again. But doing this can actually hurt your credit score. Again, this is because of your credit-utilization ratio. Every time you close a credit card account, the amount of credit available to you is lowered. If you carry a balance on your cards from month to month, then, you will automatically increase your credit-utilization ratio, hurting your credit score. Keep those paid-off accounts open. Just don’t use them to run up more credit card debt.
Don’t apply for several credit cards or loans at once: The age of your credit and loans pays a part in your credit score, too. In general, the older your credit accounts, the better they are for your credit score. If you open several new credit cards at once, you’ll drop the average age of your credit accounts. This will ding your credit score.
Check your credit reports: You can order one free copy of each of your three credit reports – one each maintained by the credit bureaus of Experian, Equifax and TransUnion – each year from AnnualCreditReport.com. Make sure to do this. Then check those reports carefully. Your credit reports will list your open credit card accounts and loans. Make sure these accounts and loans are actually ones you’ve taken out and not one that scammers have taken out in your name. Your reports also list missed or late payments. Make sure the missed payments you see are actually payments you missed, and not mistakes made the credit bureaus.
And if you do find mistakes? Correct them immediately, reaching out to the offending credit bureau. Correcting a mistake on your credit report could provide a quick boost of 100 points or more to your credit score.
The bottom line: Don’t let a low credit score keep you from applying for the best credit cards or taking out low-interest-rate loans. Just because your score is low today, doesn’t mean you can’t improve it in the future. It’s all about changing those negative financial habits and slowly, but steadily, building a stronger credit history.