Give credit to your financial future
Credit scores play a critical role in building your financial security. This score, which is a current snapshot of your credit, determines how you’ll qualify for credit cards, a mortgage or a loan.
Scores typically run between 300 and 850 – the higher, the better. A score of 760 and above is considered excellent; scores between 700 and 759 qualify as good.
You’ll likely encounter a credit check at some point in your life. For example, landlords routinely look at credit scores when evaluating you as a potential renter. When you buy or lease a car, the dealer and insurance carrier will also do a credit check, and typically give the best rates to those with the highest credit scores. Even your cell phone carrier will check your score when signing up for a mobile plan.
But a less-than-stellar credit score doesn’t need to be permanent. The following proactive steps can help improve your credit score in a matter of months.
Get a credit card (or two)
To build good credit, you must use credit. Creditors want to see a timely payment history and responsible usage. If you can’t get approved for a credit card because of a low score, opt for a secured card where your credit limit will depend on the amount of money you deposit. You can still build credit by using it, and after a year or 18 months of responsible use, you should be able to get approved for an unsecured card, which won’t require collateral or a deposit.
Pay down debt
This is the easiest way to improve your credit—if you have the money. The reason? Thirty percent of your credit score is attributed to your credit utilization rate, which is the level of available credit you are using.1 Creditors look negatively at rates above 25 percent.2 They worry that if you’re carrying too much debt, you may default.
Raise your limit
Another way to get around a high credit utilization rate is to ask for a credit limit increase from your credit card companies. If you current limit is $5,000 and your outstanding balance is $2,000, your utilization is 40 percent of your available credit. By increasing your credit limit to $10,000, you can get under that magic 25 percent rate without taking any other steps.
Pay your bills
Your credit payment history accounts for 35 percent of your credit score.1 Establishing (or re-establishing) a habit of paying your bills on time will raise your score—but you need to be patient. The more time that passes, the less weight older late payments matter. A late payment from three years ago counts less than one from last month. To avoid late and missed payments, consider setting up automatic bill paying.
Do your research
If you’re concerned about your score, review your credit report (you’re entitled to one free a report a year from each of the credit reporting bureaus through annualcreditreport.org ) and look for possible mistakes.
Identify theft, bad entries or outright errors can all tarnish your credit. According to a Federal Trade Commission study, about 5 percent of consumers have some kind of error on their credit report that affects how much they pay for financial products.3
Give it time
Be patient with your credit score. While serious credit problems may take longer to resolve, once you commit to improving your credit, you should start seeing higher scores with each passing month.
Overall, building and maintaining good credit helps you pay less for loans and other financial products, while giving you access to some important perks. By tending to your credit score, you’re laying the foundation for a lifetime of financial security.
1Wong, Kristin. “FICO's 5 credit score factors.” CreditCards.com. January 29, 2016. www.creditcards.com/credit-card-news/video-5-fico-credit-score-factors-1457.php
2Woolley, Suzanne. “How to Raise Your Credit Score, Fast.” Bloomberg. May 10, 2016. http://www.bloomberg.com/news/articles/2016-05-10/how-to-raise-your-credit-score-fast
3“In FTC Study, Five Percent of Consumers Had Errors…” Federal Trade Commission. February 11, 2013. https://www.ftc.gov/news-events/press-releases/2013/02/ftc-study-five-percent-consumers-had-errors-their-credit-reports