2019 is around the corner, and with it - for many people - will come a multitude of resolutions to save more money, pay off debts, and to generally improve their finances. A good starting point to achieve these goals is knowing and understanding your credit score. Your credit score is a critical component of your financial life. It’s the primary factor that lenders consider when determining your eligibility for loans, lines of credit, and what terms to offer.
Generally speaking, credit scores can range from 300 - 850:
300-550: Poor
550-620: Subprime
620-680: Acceptable
680-740: Good
740-850: Excellent
If one of your goals in 2019 for example, is to make a major purchase - like a home or auto - getting your score up into a higher category can potentially save you thousands of dollars.
Multiple factors go into how a credit score is calculated and although the exact components used to determine this number are trade secrets, the important elements break down as such:
35% - Payment History
30% - Debt Amount Owed
15% - Length of Credit History
10% - New Credit
10% - Types of Credit Used
So knowing this, what are the best strategies to improve your credit score? The answer to this can most accurately be found in the factors that are given the most weight. By taking action on the following three factors, you’ll find that you positively impact your score, and over time will see it rise.
Make On-Time Payments: 35%
Thirty-five percent - over one third - of your credit score is impacted by this factor alone, so it should be the primary focus of your efforts to increase your credit score. It’s not a quick fix, but if your credit score is lagging, it probably didn’t happen overnight either. Getting current and continuing to make payments on time, each and every month will result in your score slowly rising over time. At the same time, missing payments can result in a drop in your score as well, so it’s important to stay on top of this factor. Most banks have automatic payment arrangements available, which is a great way to ensure that a payment isn’t missed erroneously. If you’re already a few months behind on a credit card, for example, many creditors would rather help you get back on track and in good standing than charge off the account and will be willing to work with you to work out a payment arrangement to help you get your account current again.
Pay Balances Down: 30%
Unload your debt. Paying down account balances is a sure-fire way of improving your credit score by improving your credit utilization rate (the difference between the amounts owed against the credit limit for each account (and all accounts combined). Conversely, maxing out your credit accounts will impact your score negatively, making this the second most important factor in determining your score. In fact, if you’re using over thirty-five percent of your available credit, you’re going to be negatively impacted, so if you can’t pay off your balances completely, at least aim to keep your balances at less than 35% of your available credit limit. You can positively impact this right away if you have money saved or receive a significant amount of money such as a tax refund and apply a chunk of cash towards paying down your balance(s). This will boost your score, and ultimately keeping your balances low will continue to improve your score over time.
Another strategy to improve your credit score is to ask your creditor for a credit increase. Ironically, in doing so, you would automatically lower your utilization rate, thereby increasing the likelihood of improving your score. Beware, however, doing this does not mean go out and spend that extra credit; that would defeat the purpose. The goal is to get the credit line increase and let that work in your favor by showing an improved UR.
Credit History: 15%
Established history with creditors is an important factor in determining your credit score. The length of time you’ve had established with each creditor is important, as you are rewarded for maintaining accounts in good standing for extended periods of time. With this in mind, you should avoid closing older or unused accounts. The important factor for this is that the available portion of your credit on these accounts also goes into factoring your overall utilization rate. Simply don’t use the cards, or even better - use them only sparingly, making sure to pay off the balance in full every month. If you close an account that you no longer use, the benefits of maintaining an account in good standing with that particular creditor are diminished.
If one of your 2019 resolutions is to improve your financial life, an important first step is to get clear on credit. The previous three factors make up eighty percent of how a credit score is determined, so by focusing on these elements, you’ll make significant improvements in your score over time. By understanding where you stand in regards to your credit score, you’ll be prepared to take the appropriate steps to achieve your financial goals.