- Your credit score is a snapshot showing how well you manage money and debts.
- Higher scores help you get lower interest rates and payments on loans.
- You can raise your score by paying bills on time and staying well under credit card limits.
If you could choose between saving or squandering hundreds of thousands of dollars throughout your lifetime, the choice would be a no-brainer, right?
Unfortunately, too many Americans have that choice made for them due to a low FICO® Credit Score.
Your financial habits—how much credit you use and how you pay your bills—contribute to your FICO® Score. Over 90% of top lenders use FICO® Scores in their lending decisions. It helps them determine how likely a borrower will be to pay back a loan. Your FICO® Score is important because it can influence what credit is available to you and how much interest you’ll pay.
FICO® Scores are broken into five rating categories from “poor” (less than 580) to “exceptional” (800 and above). A “good” FICO® Score is 670 to 739. The national average reached a record high of 706 in 2019, which means the average American is in good standing.
Higher scores can save you money
Generally, the higher your FICO® Score, the lower your interest rate and payments on a loan. For example, you’d pay about $100,000 more in interest on a 30-year, fixed-rate home loan of $280,000 with a 630 rating than you would with a 760 rating, according to this FICO calculator.
Higher scores can give you privileges
Lenders aren’t the only ones using your credit history to rate you. Many businesses use credit reports to evaluate job applicants. A better credit history could put you in line for a better career opportunity. “They’re looking at this as an indicator of a candidate’s character and sense of responsibility,” says Kelley Long, a volunteer member of the AICPA Consumer Advocacy Group, which maintains the personal finance resource 360 Degrees of Financial Literacy, and a financial planner with Financial Finesse, a financial wellness benefit provider.
Many landlords perform credit checks as part of the leasing process. A credit check means the landlord is looking at your credit report from one or more of the big three reporting agencies—Experian, TransUnion, and Equifax. The information in your credit report is what’s driving your FICO® Score, so it’s all related. About 90% of landlords run credit checks to screen potential tenants, according to research from TransUnion SmartMove.
You can nudge your score higher
The following tips will help you maintain a stellar score or nudge your score into a higher rating level:
- Know your number. Get your credit score so you know where you stand. Many credit card firms are now showing your FICO® Score on your monthly statement and online for free. If your score isn’t what you think it should be, take action by following the rest of the information in this list.
- Check your credit report. Reviewing your credit report should be part of your annual financial checkup. You can get a free report once every 12 months from each of the three credit bureaus at annualcreditreport.com. Check the information carefully. If you find open accounts or delinquencies you don’t recognize, file disputes with the credit bureau.
One technique that allows you to keep an eye on your credit history throughout the year and find errors sooner is to order a free report from just one bureau every four months or so, rotating through the three bureaus. You’ll need to keep track of when you order each report. The 12-month timetable for getting a free report starts on the day you place your order from a particular bureau. Keep in mind that the three credit bureaus do not share information with one another, so your data might vary from one bureau’s report to the next.
- Pay your bills on time. Your history of on-time bill payments accounts for 35% of your credit score. “Paying every bill on time and in full will save you tons of money down the road by avoiding debt and the resulting interest,” says Ken Lin, CEO of Credit Karma. To make sure you’re always on time with your payments, use auto-pay options or set up email and text reminders.
- Limit your open accounts. “A high number of cards, with lots of closed accounts, can reflect badly,” says ProPair CEO Ethan Ewing, a former Experian executive. Avoid the temptation to sign up for lots of store credit cards just to get special deals. The resulting hit to your score could undo any savings on your purchase.
- Older is better. You want to have several open accounts to demonstrate good borrowing habits, but it’s best to maintain the same credit cards for many years instead of frequently switching to new cards in response to card company promotions. “The formula favors accounts that have been open for several years,” says financial expert Randy Mitchelson, who produces the DailyDollar newsletter. “They’re considered ‘seasoned accounts,’ and they carry weight.”
- Stay under the limit. Your usage of credit—or your credit utilization ratio—accounts for 30% of your FICO® score. The ratio compares the amount of credit you’re using on your cards to your overall available credit. It’s better to have a $500 balance on a credit card with a $5,000 limit than the same balance on a $1,000 limit card. In the first instance, you’re only using 10% of your available credit. In the second, you’re using 50%. Experts say you want your utilization ratio to go no higher than 30% at any given time.
The credit utilization ratio has an even greater effect on your score starting in 2020 when FICO announced that it would apply new credit scoring models that were expected to positively impact—by as much as a 20 point increase—those with a score above 680 who continued to make on-time payments and used 30% or less of their available credit each month, according to Debt.org. Conversely, those with a score under 680 who missed payments and spent close to their credit limit each month could see their scores drop by as much as 20 points. The new scoring system will also take into account your historical usage of credit. If you have steadily reduced debt over the last two years, your score should go up. If you’re steadily adding debt, it may drop.
- Work with a credit counselor. If your score isn’t where you want it to be and you’re having trouble managing debt or living within a budget, consulting with a certified credit counselor could help get you on the road to financial empowerment. SEIU Member Benefits offers tips on how to find a credit counselor you can trust.
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