Like it or not, our credit scores are now used to determine all sorts of factors in our financial lives. Once viewed as a necessity when applying for a mortgage or taking out a loan, it now factors into renting an apartment, paying for utilities, buying a cell phone, applying for certain jobs, and determining insurance rates.
Here are 6 tips for improving and maintaining your credit score:
1. Keep tabs on credit reports. You can get a free credit report from each reporting agency every 12 months on the Annual Credit Report website. These reports tell you everything you need to know about items impacting your credit score. Reviewing these items on a routine basis is an important exercise to ensure a correct report. If you find a mistake, you can work to get it removed and improve your score.
2. Pay attention to bill management. One bill that goes more than 30 days past its due date can drop your credit score 40 points and can stay on your credit report for seven years! If you are in a cash pinch and can’t pay all your bills on time, prioritize mortgage, car loan and credit card bills that report late payments to credit agencies. Utilities and medical organizations generally don’t report a delinquency until your account is sent to a collection agency.
3. Prioritize paying down debt. Current debt balances account for as much as 30 percent of your credit score. When you consider this and the high interest rates that come with debt, it’s important to get those balances to zero as soon as possible. Your debt-to-income ratio (total debt divided by your total income) doesn’t directly affect your credit score, but it’s a key metric used by underwriters when determining loan eligibility and interest rates.
4. Consider credit limits. Each credit card has a credit limit which the credit reporting agencies compare to how much of it you use. The higher amount of the credit limit you use, the lower your credit score, even if you pay the bill in full each month. Ideally, try to keep the spending balance less than 20 percent of your credit limit. If your routine spending is higher than this, consider requesting a higher line of credit, but do not use it. The sole purpose of this request is to create a higher credit score.
5. Add new debt carefully. Taking on new debt can reduce your credit score in a few different ways: your debt profile increases, your debt-to-income ratio rises, and even the credit inquiry itself can take a chunk out of your score. If you have a relatively short credit history, too many credit inquires will affect you even more.
6. Manage credit cards to your advantage. Have an open credit card that you’ve paid off or have never used? Your instinct might tell you to close the account, but keeping it open may actually help your credit score. An active credit card in good standing for a long period of time helps your credit score. Plus, the additional unused credit limit on your books lowers the ratio of spending to total credit limit and improves your score.
It's worth your time to monitor and analyze your credit score on an on-going basis. Taking a proactive role by implementing some or all of these tactics is a savvy way to boost your credit score and improve your overall credit health.