It would be great if your credit score didn’t matter. Wouldn’t it be nice if it worked like this: You could walk into a bank and ask for a loan – for a car, let’s say. You promise to pay it back. The banker asks you some questions, makes sure you have income, looks you in the eye, shakes your hand, and makes a decision. What if we lived in that world? What if there was more trust based on conversations and face-to-face interactions?
But we don’t live in that world. We live in a world where your credit score, which is based on your credit history, determines whether or not you will get a loan and, if you do get it, what the interest rate on that loan will be. Your credit score is a quick way for a lender to determine how risky it may be to lend you money. Building a credit history is important, and maintaining good credit (or a good credit score) is even more important. Once the score goes south, it’s hard to repair. But stuff happens, and sometimes a decision or a mistake will take a chunk away from your credit score. Fear not! There are some ways you can improve a credit score.
Watch the Revolving Credit Balances
“Revolving” credit is credit that automatically renews as you pay your debt. This includes credit cards and lines of credit. Keep the balances low to improve your score. The credit score will reward you when you have available credit, so pay off as much as you can and try not to use available credit unless absolutely necessary.
Pay It Off
Some people think opening more revolving credit and moving the debt around will help the credit score. The opposite is actually true. Lots of applications for credit can hurt your score, for one. Having fewer credit options with a lot of credit available on them is better for your score. Here’s an example:
- Worse – 6 credit cards, each with a $1,000 limit, and each with $500 of available credit.
- Better – 3 credit cards, each with a $2,000, and each with $1,000 of available credit.
In each case, the total available credit is the same ($3,000), but the credit score will reward the latter of the two. Of course, having the three cards with more than $3,000 of available credit is even better.
Keep It Open
If you pay off a credit card and you don’t need the card, keep the account open (as long as it is free of fees). Again, this will show a low – or zero – balance with available credit, which is good for the score. If you close the card, the credit is no longer available, which would make it a non-factor for your credit score.
When Available Credit Is Bad
Generally, having low balances and available credit is good for your score, but some people try to play the system by opening many credit cards rapidly in order to raise the available credit. This will most likely backfire because rapidly applying for credit cards is seen as risky and will lower the score.
Pay Your Bills and Pay On Time
Paying your bills on time is one of the easiest ways to build credit and improve your score. A late payment, especially one that goes into collections, will tear your score apart. A collection account stays on your credit report for seven years after it’s paid off.
If You Are Late, Catch Up
Older credit history counts less towards your score, so if you can get current on late bills, then do so, and stay that way. Recent good payments count more than older bad payments.
Finally, Know Your Limits
The credit score is all about risk. If you can have credit cards and manage them responsibly, then this will be good for your score. On the other hand, if having available credit makes you spend more than you should, get rid of the cards. If you know you can’t afford the payments for the latest iPhone, then don’t buy it yet. In general, knowing your limits is the best way to avoid financial trouble and to improve your credit score.S