- Do you know whether you should have more credit cards or just one?
- Should you pay the minimum to keep a balance on your card to show a history of on-time payments?
- Or should you pay it off in full each month?
- And why should you care?
Is Your Score Excellent, Good, Average?
(If you don’t know your numbers, you can go to Credit Karma to get your score for free – they also help you play around with scenarios to figure out what you should do to improve your score.)
Why it Pays to Score High
Let’s start with why you should pay attention to your credit score. When you apply for a loan – whether for a house, a car, or even a credit card – the bank checks your credit score. The bank then uses your score to:
- Evaluate whether to loan to you at all.
- Decide how much they are willing to loan to you.
- Determine how high your interest rate will be.
Let’s play some what if’s:
- Assume you want to buy a house, but you have a credit score in the 600′s. You will likely qualify for a loan, but it may be for less money than if your score were in the 700′s and likely your interest rate would be 0.50% higher or more. On a 100,000 house loan, that extra 1/2 a percent will cost you an extra $7,700 over the life of your loan. Another way to look at it is that you could SAVE $7,700 if you improved your credit score.
- Assume you want to buy a car – price is $20,000, financed over 5 years – rate is 2% higher due to poor credit score. Your car will cost you an extra $1,033 that you could have saved for retirement, college, or vacation instead of paying into the bank’s pockets.
How to Improve your Credit Scores
Now that you’re on board with improving your credit score, here are some tips on how to go about it:
- Establish a good payment history. Pay your bills on time. Online banking is really helpful for paying those recurring bills without forgetting.
- You want to increase the ratio of your available credit to the debt you owe.Pay extra on your credit cards, paying off the lowest balance first and then moving to the next lowest balance. This will allow you to have the minimum payment amount – usually $20 on low balances – available more quickly to pay toward your next credit card.
- Also, for increasing your available credit to debt owed – do not close any credit card accounts. UNLESS they have an annual fee, then ditch them asap. There are plenty available without annual fees.
- Create a credit history. Some people operate on a completely cash basis. This is great for minimizing debt and living within your means, but works against your credit score. Credit score is partly based on how long you’ve proven you can repay your loans. Get a loan – whether house, auto, furniture, or credit card – and pay it! Don’t buy something you can’t afford, but do start developing your credit history.
- Keep your debt to income ratio low. Basically, live within your means. Always a good idea, but especially when trying to improve your credit score.
- Plan ahead. Every time you apply for a credit card or a loan, that credit inquiry is logged. The number of inquiries in the most recent 12 months decreases your credit score. Therefore, you want to get those credit cards approved and start establishing that credit history at least a year before you are really wanting to use it – say for buying a house.
I was pretty impressed with the what if scenarios that Credit Karma provides. If there is a scenario I didn’t cover, I suggest heading over there (it is free) and seeing if they have a what if scenario to address your question.
Is it clear as mud now? Anything else that you’re wondering that I didn’t include?