One of the questions I am asked most often is: How can I improve my credit score?
A credit score is not always the most critical factor in your financial journey. Now, if you have a strong score, that’s good. But you don’t necessarily need it if you’re paying cash for your next car, emergency or appliance.
On the other hand, if your score is lower than you would like, there are ways to improve it and even prepare yourself for the day you will use cash to buy that next car.
Either way, here are some basic things you should know about your credit score and answers to other questions that may help you determine where you are and where you need to be.
How is my credit score determined? Essentially, it’s a combination of these five factors, but other things may contribute.
- Payment history (35%). This shows your level of responsibility as a borrower–have you been making timely payments, and for how long?
- How much do you owe (30%)? Add up all your credit balances to get this number. This is based on the entire amount you owe, how many accounts you have, and the percentage of the money you owe compared to how much credit you have available.
- Length of credit history (15%). If you have a lot of experience using credit, have established accounts for several years, and paying on time, your score will increase.
- Recent activity (10%). This factors in new accounts and credit inquiries.
- Types of accounts (10%). A mix of accounts, including installment loans, home loans, and retail and credit cards, is good.
What is the difference between my credit score and my FICO score? Honestly, they measure similar behavior and history, but they use different algorithms. Lenders want to know what type of risk you will bring them if they loan you money. Experian, TransUnion and Equifax are the three companies that provide your history and rate using the above system to track your past. Banks and other lenders may use your FICO score.
- FICO: A person’s credit score calculated with software from Fair Isaac Corporation (FICO).
- Standard credit score: A number assigned to a person indicates their capacity to repay a loan to lenders.
Do I need a good credit score? Ah, now there is the great question. The answer depends on your goals and your focus. If you want to pay cash for your next car or appliance, then, no, it doesn’t matter because there will be no lender involved. You can actually buy a house without a credit score (if that results from using no credit cards or other tracking).
How do I know if my score is good? Here’s the standard chart that gives the rating for your score. Using a 300-850 range, 700 is considered to be a threshold for many lenders. Often, a tweak here or there can move you into the next category. You can check your score quickly on an app like Credit Karma.
How do I improve my credit score? Pay your bills on time, don’t overextend yourself, keep your debt-to-credit limit and debt-to-income low. The quickest way to raise your score is to bring every delinquent debt current and pay bills on time. Maintain a low credit profile. In other words, don’t increase your debt by using credit cards, buying an automobile or anything on credit.
Should I clean up my credit report by closing old accounts? Not necessarily, especially if you’re trying to maintain a high score. Closing a long-standing account could lower your score, even if you aren’t using it.
Do I need to check my credit report regularly? Absolutely, especially in these times. You can have it removed or updated if you see something on the report that doesn’t look right. You can get your free credit report here or here. You can also use a service like Credit Karma to do a more regular check. It provides a higher-level view but should alert you to any potential problems.
How does my score compare with others? You can compare your score to the chart to the right. Sixty-one percent of Americans have a fair score or better.
As a Ramsey Preferred Coach, obviously, we encourage you to pay down your debt quickly, make on-time payments on all bills and establish a cash reserve (emergency fund) to ensure success on your financial journey. This will reduce stress and bring peace of mind, and if it’s important to you, it will generally improve your credit score.