By Mya Finn
It’s hard to overstate the value of a good credit score. It’s the gateway to favorable terms and easy approvals when applying for a loan. A good credit score will help you qualify for credit cards with low annual percentage rates and attractive benefits. In short, it will grant you the freedom to pursue your financial goals.
While creditors take various parameters into account when making lending determinations, a FICO or VantageScore credit score is typically one of them. In the U.S., these two companies reign supreme in the credit scoring space.
FICO and VantageScore both use a credit range of 350 to 850, with scores of 700 and above being considered good. If your score tops 800, it’s deemed exceptional. A high score represents a lower risk to lenders and thus a higher chance of you getting the credit you seek.
You can maintain control of your credit score and keep it in the high range by managing your finances responsibly. If you are reckless in your spending habits, though, your score can plunge southward. Should you find yourself in that unenviable position, the following steps can help fix your poor credit score.
- Keep Your Credit Utilization Ratio Down
Various factors contribute to your credit score. Credit utilization ratio is one of the biggest components, making up 30% of the score. It is a measure of how much credit you are using relative to the credit you have access to. If your credit limit is $10,000 and you spend $2,000, for example, your utilization is 20%.
Credit bureaus want to see a credit utilization ratio of 30% or lower, on both an overall and per-card basis. Your overall calculation is based on your use of all available credit extended to you (credit cards, loans, lines of credit, etc.).
You should strive to keep your total balances on all these accounts below 30% of your aggregate limits. But your per-card utilization is also a factor, so don’t max out one card to pay off another in full.
If your credit utilization is high, there are some tactics you can use to bring it down. Start by splitting purchases between different cards (if your per-card utilization is a problem). Make a small extra payment every month and/or schedule payments so they post before the end of the billing cycle. Or ask your issuer for an increased credit limit — provided you have the discipline not to spend up to the new limit.
- Use a Credit Builder Card
A credit builder card is a good way to build credit while keeping your spending under control. The card requires a cash deposit, which then becomes your credit limit. So if you deposit $500, your limit is $500.
A credit builder card is an excellent way of limiting your risk. And because the card issuer’s risk is likewise limited, such cards are easier to obtain. Using the card responsibly can improve your credit score and even qualify you for a regular credit card in time. In fact, a secured card like this is one of the quickest and easiest ways of building a good credit score.
Just make sure you take care of a few things. Use the card regularly, even if it’s only for minor purchases. The point is to demonstrate responsible credit use by making purchases and — most importantly — on-time payments. Don’t max out your card; you’ll want to keep your balance at 30% or less of your credit limit. Better still, pay the entire balance before the due date every month.
- Make Payments on Time
As important as your credit utilization ratio is, there’s another criterion that’s even more so. Payment history is the most significant factor in your credit score, accounting for 35%. If you’ve defaulted on a loan or have a record of late credit card payments, you’ll have some repair work to do.
To improve your credit score, commit to making on-time payments. It doesn’t matter even if you only make minimum due payments; it will ensure a positive standing for your account. It will also enable you to avoid late fees.
To be certain you never make a late payment, set up autopay for all your credit cards. While you’re at it, do the same for recurring monthly obligations like utility, internet, and streaming service bills. Credit bureaus will reward your consistent payment, and you can rely on tech to keep you on the straight and narrow.
- Avoid Applying for New Credit Cards
When you are busy trying to repair your credit score, it is not a good idea to apply for new credit cards. Such applications will trigger detailed reviews of your credit status. These so-called “hard inquiries” and new accounts opened will show up on your credit report. They account for 10% of your FICO score.
Attempts to obtain many cards over a short period can be seen as an indication of your poor financial status by lenders. It will increase your level of risk as a borrower and lead to a further decrease in your score. It’s better to stick with the cards you already have and demonstrate prudent use of them.
- But Don’t Close the Old Ones, Either
If you believe closing a credit card can improve your credit score, you’d be wrong. You might feel tempted to close card accounts that charge annual fees, and that’s understandable. But your credit report will still reflect the outstanding balance until they are fully cleared. Leaving them open and paying them down every month is a better approach to improving your credit score.
Even eliminating a card with a zero balance can hurt your credit score, for two reasons. First of all, closing an account will reduce the amount of credit you have available. This will cause your credit utilization ratio to go up.
For example, if you currently owe $1,000 on $4,000 of available credit, your ratio is an acceptable 25%. If you close a card with a $2,000 limit, suddenly your credit utilization will shoot up to 50%.
Recognize, too, that the length of your credit history constitutes 15% of your credit score. Here, longer is definitely better. The age of your oldest and most recent accounts, and the average age of all your accounts, go into creating your credit history length. Your credit score will increase if you keep old accounts open rather than closing them.
Conclusion
It is crucial to maintain a good credit score if you want to enjoy a financially stable life. When you maintain a good credit score, the savings can be quite substantial. In fact, a good credit score can save you thousands of dollars over your lifetime.
You can qualify for new loans at lower rates. Applying for low-APR credit cards will be easy. You will get better terms on a home mortgage and won’t have to make as large a down payment. With all these advantages, it pays to start improving your credit score today.
