Let’s be real—how often do you think about your credit score? Probably not all that often, right? But here’s the thing: those three little digits have a lot to say about your financial past and can affect your financial future in ways you might not even realize.
Your credit score can influence how much you’ll pay in interest when borrowing money, your insurance rates, and even whether you can land a job that requires a security clearance. A low score doesn’t mean you’re a bad person, but it does mean you might have a tougher time with financial opportunities. So if your credit score needs some TLC, don’t stress! Let’s break down how it works and give you some easy-to-follow tips to improve it.
Understanding Credit Scores
There are three major credit bureaus—Equifax, Experian, and TransUnion—each with its own scoring model. The two main ones are FICO® and VantageScore. Your FICO® Score is the most widely used, and you can typically check it through your bank or credit card provider.
Credit scores range from 300 to 850, with a higher score making you more attractive to lenders. If your score is over 800, you’re in the clear to qualify for most loans. The sweet spot for lenders is typically 700 or higher.
FICO® Scores are based on five key factors, each with different levels of importance:
- Payment history (35%): This is the big one. If you make your payments on time, you’re off to a great start!
- Credit utilization (30%): This refers to how much of your available credit you’re using. Ideally, you want to keep this under 30%.
- Length of credit history (15%): The longer your accounts have been open, the better it looks.
- Credit mix (10%): A mix of credit accounts—like credit cards, student loans, and a mortgage—is more favorable than just having one type of credit.
- New credit (10%): This reflects how often you apply for new credit. Don’t go opening new accounts too frequently, as it can hurt your score.
Check Your Credit Report
It’s always a good idea to check your credit report regularly to ensure all the info is accurate. You can get a free copy of your credit report once a year from AnnualCreditReport.com (and as of the end of 2023, you can check it weekly).
Look for errors, like accounts that don’t belong to you or old accounts that should have dropped off after seven years. Fixing these mistakes can help improve your score.
Freeze Your Credit
If you want to keep your credit safe from scammers—or even from yourself—consider freezing your credit with all three bureaus. It’s easy to do and prevents anyone from opening new accounts in your name. If you need to apply for credit in the future, you can temporarily unfreeze your credit by providing a PIN to verify your identity.
It’s a simple, protective step to take that can keep your financial future safe.
Set Up Auto Pay
One of the most effective ways to improve your credit is to make sure you never miss a payment. Set up auto pay for all your bills—your mortgage, car payment, and at least the minimum payment on your credit cards.
Better yet, if you can afford it, pay off your credit cards in full each month to avoid interest and keep your credit utilization low. But even if you only pay the minimum, just making sure the payment is on time will build a solid credit history.
Try setting up auto pay for small, regular bills (like your Netflix subscription) through your credit card. This keeps the credit account active while helping you avoid debt and keep your credit score on the up and up.
A Few Things to Avoid
While some credit moves will boost your score, others can hurt it. Here are a few things to steer clear of:
- Closing credit accounts with annual fees: If you’re paying fees to borrow money, it’s probably not worth keeping those cards open.
- Cosigning loans: If someone needs a cosigner, it means their credit isn’t strong enough to secure a loan on their own. If they miss payments, you’re stuck with the debt.
- Applying for joint credit: When you apply for a mortgage with a partner, their credit score will impact the interest rate you get. If they have a lower score, it can cost you more.
Avoiding these credit pitfalls will help you maintain your score and make sure you’re not taking on unnecessary risk.
Bankruptcy: The Last Resort
Declaring bankruptcy is one of the most damaging things you can do to your credit score. It stays on your credit report for 7 to 10 years and can make it incredibly difficult to get loans or credit in the future. If you’re struggling with debt, try negotiating with creditors before resorting to bankruptcy.
Remember: Your Credit Score Isn’t Who You Are
It’s easy to get caught up in the numbers, but your credit score doesn’t define you. It’s a tool that helps lenders assess your financial behavior, but it doesn’t mean you’re good or bad with money.
Some financial experts, like Dave Ramsey, suggest opting out of the credit score system altogether. While that’s certainly an option, it could make it harder for you to get loans or navigate certain financial situations in the future. A better option is to set up auto pay, keep credit utilization low, freeze your credit for protection, and avoid unnecessary debt. By doing these things, you’ll build a better score over time, putting you in control of your financial future.