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How to Improve Your Credit Score

Your credit score: most days you probably don’t think about it at all. But at pivotal milestones throughout your life, a good credit score suddenly becomes crucial. Your credit score affects your ability to buy a new car, qualify for student loans, get approved for an apartment or even land a job.
With a good credit score, you’ll be able to finance a vehicle, get approved for an apartment with a safety deposit, and pass an employment background check. And with an excellent credit score, you’ll find yourself eligible for the lowest interest rates, with better chance of approval for loans and rentals, access to the best credit cards, higher credit limits, easier mortgage approval and so much more.
No matter where you are in life, it’s worthwhile to put in the effort to move your credit score from bad to good, or from good to excellent. So where do you start?

Figuring Out Your Credit Score

Begin by requesting a free copy of your credit report from all three major credit reporting bureaus – Equifax®, Experian®, and TransUnion® at AnnualCreditReport.com. You’re entitled to one every year no matter what, and potentially more often in extenuating circumstances (like if you’ve recently been denied credit or you’re on welfare).
Your credit score, or FICO score, is a number ranging from 300 to 850. FICO is the largest and best-known company that uses proprietary software to calculate how much of a risk it is for lenders to give you money – also known as your credit score. Generally, once your score hits 580 (a “fair” score), doors will start opening up to you. And while 850 is the maximum credit score, you’re usually eligible for the lowest interest rates once your score hits 750.  
If your credit score isn’t as good as you’d like it to be, that’s because of your borrowing history. According to FICO, although the specifics of how they analyze borrowing activity to calculate scores is a secret, the breakdown generally goes something like this:

  • 35 percent of your credit score is based on your payment history. Have you paid your credit card bills, student loans and rent on time, every month? Even one missed or late payment can cause a ding to your score. The impact of a more serious issue, like a bankruptcy can be significant.
  • 30 percent of your credit score is based on your utilization history. This translates into how much of your available credit you have tied up. If you have multiple maxed-out credit cards, this category probably isn’t looking great. Conventional wisdom says to keep your credit card usage at about 30 percent of its limit. FICO says the people with the best scores have less than 6 percent utilization.
  • 15 percent of your credit score is based on your credit history. How long has your longest credit account been open. How long has it been since you charged something to or made a payment on each account?
  • 10 percent of your credit score is based on new credit. FICO doesn’t want to see you open too many new credit accounts at once. That could be a sign you’re in financial trouble.
  • 10 percent of your credit score is based on credit mix. Even if you’ve been paying student loans or a mortgage on time every month for a decade, that might not be good enough. “People with no credit cards tend to be viewed as higher risk than people who have managed credit cards responsibly,” said Tommy Lee, a principal scientist at FICO. “Having credit cards and installment loans with a good credit history will help your FICO scores.”

Improving Your Credit Score: Five Ways to Start

Check your credit report and address any inaccuracies.

Once you have access to the three credit reports you requested, look closely at what they say. This is especially important if your score is lower than you’d like. According to FICO, “26 percent of participants in a study by the Federal Trade Commission (FTC) identified at least one error on their credit report that could make them appear riskier to lenders.”
Check for clerical errors, accounts that are accidentally listed twice, accuracy in the reason for closed credit accounts, debts belonging to an ex-spouse if you’re divorced, bad debts that are past the statute of limitation for removal (seven years), or accounts you don’t recognize. Those accounts may belong to someone with a similar name to you or your identity may have been compromised. If you find an error on your credit report, you can initiate a dispute online. Be clear about which item you’re disputing and why. If you’re able to get a bad debt corrected or removed from your report, it can have an immediate impact.

Pay your bills on time.

If you have any outstanding accounts, get current on them as quickly as possible. Being current can make a significant impact fairly quickly. If you have trouble remembering to pay your bills, set up automatic payment reminders. You can also enroll in automatic payments. But you need to be confident the account you’ll automatically withdraw from will always have sufficient funds. Also know that paying off a debt that’s in collections will not increase your credit score. An account that has gone to collections will stay on your report for seven years.

Keep your oldest credit card accounts open …

But don’t use them.

Keeping your oldest accounts open (especially if they don’t come with an annual fee) will contribute to your credit history length. Keeping them purchase-free will both reduce the total amount you owe and reduce your debt-to-credit limit ratio. If you think having too many open accounts will tempt you to buy things you can’t really afford, cut up the physical card.

Ask for help if you need it.

“If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor,” FICO advises. “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 FICO Scores.”
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