Anyone who’s ever tried to finance the purchase of a house, a car, a business expense or even an education loan knows, your credit score can be all-important at certain points in your life.
“It is so important today to understand how credit reporting and scoring works to be financially successful,” said Rod Griffin, director of consumer education and awareness at Experian.
Experian along with Equifax and TransUnion are the three major credit bureaus that collect information about your spending and create a report on your credit history.
When lenders check your credit, they’ll almost certainly do so with one of these credit reporting agencies (CRAs).
While each CRA has its own scoring model, the general rule of thumb for an average FICO score is typically anywhere between 300 to 850.
The average American’s FICO score for classic models is 700 or a little above, according to Griffin. If you get to that 700 mark, you’re near prime, and anything above 750 is typically considered great.
“Having a low credit score is one of those things that can stay with you forever,” said Jerrod Ferguson, senior wealth adviser and certified financial planner at Vance Wealth Management.
If you don’t have a good credit score, you will be charged higher interest rates for future purchases, like buying a car or a home, and therefore, the amount of debt you have will inevitably be higher, Ferguson explained.
If your scores aren’t the best, there are plenty of things you can do right now to move toward that goal.
1. Review your credit report and make sure everything on it is accurate.
“It boils down to awareness and an understanding of some of the basic fundamentals,” said Nancy E. Bistritz-Balkan, vice president of communications and consumer education at Equifax.
That includes understanding what actually comprises a credit score: the number and types of accounts you have, your used credit versus your available credit, the length of your credit history, and your payment history, according to Bistritz-Balkan.
“The first thing you want to do would be to review your credit reports and make sure you fully understand what’s on there and if there are any delinquencies,” Ferguson said.
CRAs make mistakes, and according to Amy Thomann, senior managing editor and spokesperson for TransUnion, and inaccuracies can negatively impact your credit.
You’re allowed a free copy of your credit report annually that won’t ding your score, which you can get at annualcreditreport.com, Thomann said.
Reviewing your credit report will not only help protect you from identity theft, but can also help you dispute things that are not correct, according to Erick Arndt, a financial adviser at Virtue Wealth.
“This can allow you to start chipping away at things that aren’t factually correct,” Arndt said. “Companies have 30 days to respond to a dispute or else it will come off your credit report.”
2. Don’t let old mistakes haunt you — clear up any collection accounts and delinquencies.
Checking your credit report will also allow you to see if you have any delinquencies, which typically consist of old debts you didn’t pay, like old utilities you overlooked when you moved or balances on retail credit cards you forgot existed.
Arndt says delinquent accounts can really affect your score, so be sure to set up payment plans for any negatives you see.
Overall, time will help with delinquencies as they can ultimately stay on your credit report for seven to 10 years, according to Ferguson.
3. Address any risk factors that are shown on your credit report.
Every credit report will have four or five risk factors, which tell you what is most affecting your score, according to Griffin.
“These tell you exactly what you need to work on to better your score in order of most important,” Griffin said. “If you address your risk factors, your whole score will get better.”
4. Prevent any late payments by setting up payment reminders.
“The most important factor in building or maintaining healthy credit is to pay bills on time and in full each month,” Thomann said.
Setting up automatic payments is an easy way to ensure that you don’t forget all of your different due dates, according to Thomann. But if that isn’t feasible, setting up a reminder is key, Ferguson said.
5. Fix your credit utilization ratio.
If your credit card balance every month is more than 30 percent of your credit limit, your score is suffering, even if you’re paying off your balance in full by the due date, according to Griffin.
“Having access to credit, but using a low amount of the available credit, demonstrates responsible borrowing to lenders,” Thomann said.
Keeping your balances as low as possible is vital to bettering your scores, Griffin said. If you get above 30 percent, your scores will start to drop much faster.
“Credit agencies are able to gauge how quickly and how concurrently you make payments,” said Manu Wali, managing partner at Continuum Global Asset Management, LLC. “So if you make payments in full way before the deadline, your credit score will go up because you ‘paid off a debt.’”
6. What about credit cards?
There is no exact number of credit cards you should have, according to many financial advisers. Most agree that everyone should have a credit card for security and to help improve your credit scores; however, they can also open the door to problems if you aren’t diligent to pay them off every month, Arndt said.
If someone can’t honor the commitments and responsibilities that come with a credit card, then it may not be in their best interest to get one, Bistritz-Balkan said.
“The number of credit cards you hold isn’t nearly as important as what you do with them,” Thomann said. “It’s better to have one or two cards with good payment records than lots of cards with high balances or missed payments.”
Griffin believes credit cards shows CRAs that you can make good independent borrowing decisions by giving them insight into how much you choose to borrow and pay.
And if you do have multiple cards, Ferguson advises you to make sure to identify why you are using each card.
You should also think about your overall financial situation before closing unused credit cards, Griffin said.
Because the limit on the card you want to close is going toward the percentage of credit you don’t use in your credit utilization ratio, closing credit cards can negatively affect your score, according to Ferguson.
“Having an account with a long history and solid track record of paying bills on time every time are the types of responsible habits lenders and creditors look for,” Bistritz-Balkan said. “Therefore, closing that account might not be in the consumer’s best interest.”
Closing a card will also cause your score to dip, so either close a card well in advance of any loan applications you plan on filing or wait until after. In most cases, scores will rebound if no significant new debt accrues, Griffin said.
Just this month, Experian launched Experian Boost, a free service that gives you the choice to give them access to the bank accounts you use to pay your bills. This allows them to view your utility, cell phone, rent payments, etc., which means that your positive payment history can now be added to your credit report. The program will give you your FICO score before and after so that you can see the difference it has made, and most see an increase in scores of 10 or more points almost instantly, according to Rod Griffin, director of consumer education and awareness at Experian.
Erick Arndt, a financial adviser at Virtue Wealth, suggests listening to “The Dave Ramsey Show,” a podcast dedicated to giving financial advice and answering life’s tough money questions. The podcast airs on daveramsey.com/show from 11 a.m. to 2 p.m. Monday through Friday.