Credit scores are one of those little things in life that while they can have a significant impact on people’s financial bottom lines, many people don’t understand all of the ins and outs. Here are a few tips to improve or maintain a good credit rating. Keep in mind that a small improvement in a credit rating can impact the interest that you pay on mortgages and other loans. Here are a few handy reminders to help you improve your score
- Order a copy of your credit report. Review it carefully. Correct any significant errors. This can be done by sending in letters to all three of the credit bureaus.
- Pay your bills on time, every time.
- Don’t open a lot of new accounts over a short time period, especially if you have a short credit history.
- Shop for credit over a short period of time. FICO scores distinguish between searching for credit for a specific loan and searching for lots of different credit lines.
- Apply for and open new credit accounts only as needed. Don’t open accounts just to have a better credit mix – it probably won’t raise your score.
- If you have a questionable credit history, open a few new credit accounts, use them responsibly, and pay them off on time. In general, having credit cards and installment loans (and paying timely payments) will raise your score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.
- Don’t open credit accounts you don’t intend to use. Also, don’t open a number of new credit cards that you don’t need, just to increase your available credit.
This approach could backfire and actually lower score. New accounts will lower your average account age, which will have a larger effect on your score if you don’t have a lot of other credit information. Also, rapid account buildup can look risky if you are a new credit user.
- A credit card or installment loan can raise your score as long as you don’t have too high a balance and you pay it off in a timely manner.
- Keep your balance low in relation to your available credit. If your credit limit is $10,000, keeping your balance below $2,500 (25%) will improve your score.
- Pay off credit card debt rather than move it around to lower rate cards. Moving balances to other credit cards and closing out the old account can hurt your score because it can change the ratio of your total credit card balances to your total available credit lines. The most effective way to improve your score in this area is by paying down your revolving credit. In fact, owing the same amount but having fewer open accounts may lower your score.
- Don’t close unused credit cards as a short-term strategy to raise your score.
Keep in mind also that negative items affect your credit score much more quickly than positive items. Late payments can negatively affect your score in just a few months, whereas paying bills on time may take 6 to 12 months to generate a significant improvement in your score.
Be aware that paying off a collection account will not remove it from your credit report. It will stay on your report for seven years.
Note that closing an account doesn’t make it go away.
A closed account will still show up on your credit report, and may be considered by the score.
The launch of AnnualCreditReport.com entitles every American consumer — about 200 million people — to a free copy of their credit report each year. Check yours to see how you stack up.
Best wishes in improving your FICO.