By Alex Summers
Your credit score is one of the most important numbers in your financial life. No matter what you think about credit and debt, there’s no shaking the fact that a lot of companies use your credit score to make decisions about you. Everyone knows that banks and credit card companies use your score to decide whether or not to extend credit. A good score means favorable rates and access to the best credit cards. A bad score means high down payments, higher rates, and limited access, if any, to credit cards that aren’t as good. What you might not know is that landlords, cell phone companies, and utility companies also use your score to make decisions. Landlords decide who to rent to based on credit scores because it’s a sign of your risk. Cell phone companies, who give out free phones for long term contracts, want to make sure you meet your obligations and continue paying during that contract. Having a good score is more important than you might have expected.
So how do you improve it?
Quite simple.
First, stop applying for credit cards. When you apply for a new credit card, that company pulls your credit history using a hard inquiry. A hard inquiry will knock your score down a few points for every inquiry. That latest credit card with the awesome cash back offer? Ding, that’s points off. The fewer inquiries you have, the better.
Make sure your credit reports are accurate. Credit reports are full of errors, so take advantage of the Fair Credit Reporting Act and review your three credit reports (Experian, Equifax, TransUnion) every year to make sure there are no errors. If you do find one, dispute it immediately because it can take some time to fix.
Make sure you pay your bills on time. Missing payments or making late payments hurt more than almost anything else (other than significant events like bankruptcy and default on a loan), so make sure you put a system in place so you never miss a payment. That system can save your butt and your credit score if it prevents even one missed payment.
Don’t cancel cards. One large component of your credit score is credit history and the age of accounts. When you close a credit card, you’re potentially lowering the average age. Another large component is credit utilization, which is the percentage of credit you are currently using. Close a card and that number goes up. If you don’t like a card, just stick it in a desk drawer for now.
You might be asking yourself, what is a good credit score? According to Fair Isaac, anything over 760 qualifies you for the lowest mortgage rates. If you have a score above 700, you’re still in great shape. As you get lower, the rates you would be expected to pay will increase. So if you have a score above 700, I wouldn’t worry too much about it.
Your score is important but don’t let it be all consuming!
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