Keeping a great credit score is the best way to save money on your mortgage, car loan, credit cards, and other interest rates, but it takes responsible financial choices with money, credit, and debt to achieve that. As FICO scores range from 300-850, with 680 considered good and above 720 excellent, it’s important to understand these seven habits that will increase your credit score and improve your finances over time.
1. Get your financial house in order.
The first step to building a great credit score is setting correct habits with the rest of your finances. Document what you spend every month, eliminate the waste, and then set a monthly budget and stick to it. That should also include putting money in savings, automatically out of your paycheck if possible. These days, the U.S. has a 2% savings rate, which is near an all-time low, yet most people are only a job loss, medical problem, or divorce away from financial disaster. Build a safety net, plan, and keep all of your financial paperwork organized and up-to-date.
2. Pay balances down – but not off.
Your credit utilization ratio – how much debt you keep compared to your total available balances – is a major factor when calculating credit score. Common advice is that you should keep that ratio at or below 30% ($3,000 of debt for a credit card with $10,000 available), but credit experts now suggest that 10% or less is a better ratio to maintain to boost your score to the top. In fact, a survey of those who had scores above 785 revealed their average credit card balances relative to their limits was just 7%. However, don’t go all the way to 0% because it won’t show an established payment history they can use in their calculations (you won’t have any payment.)
FICO calculates 30% of their scoring model by the overall money you owe and how close you are to the limits on your credit cards and revolving debt, so low balances and healthy ratios are the key to a top score.
3. Pay on time (or before!)
Always pay by or before the due date and give a quick call or log in to your account to make sure they payment was received and processed. Since payment history is 35% of FICO’s scoring model, paying on time is crucial. It may seem like basic advice, but even one late payment or derogatory item on your credit report can hurt your score on a long-term basis, since they “stick” for seven years. According to FICO, 96% of people with a FICO score of 785 or greater have no late payments on their credit reports, so be one of those people who have a spotless payment history if you want the perfect FICO.
If you want to take your good payment habits a step further, pay by the report date. Each creditor has a report date, when they send their information into the credit bureaus and FICO. If you use your credit card a lot and pay it off at the due date, the higher balance will always show on your credit report that month because report date is before due date. So experts recommend you make payments well before you receive your bill and the due date. Try paying off (or down) your purchases at the end of every week for the best credit score. Online payments are usually processed in 2-3 days, so that’s an efficient way of paying before it reports.
4. Let your accounts age.
15% of FICO’s scoring is calculated in regards to your credit history of credit, with favor given to well-seasoned accounts that have been open and in good standing longer. (Anything that is older than24-48 months is a huge boost to your credit score.)
In fact, most consumers with great credit scores have, on average, an oldest account that’s 19 years old. The average age of their accounts is between 6 and 12 years old and they opened their most recent account 27 months ago or more. But even if you don’t have a credit account open 19 years, be choosy about what credit you apply for and when you get it, keep it open for as long as possible, and don’t close down your oldest trade lines unless you absolutely have to.
5. Monitor your credit and dispute inaccuracies.
You’d be surprised how many people neglect to obtain and review a copy of their credit reports. Why is that so important? A 2012 study by the Federal Trade Commission reported that at least 20% of consumers have an error on at least one of their three credit reports. That’s 1 in 5 who have something glaringly wrong on their credit reports. Those mistakes will cost you dearly – you might not qualify for that home you’re trying to buy or even pay hundreds of thousands of dollars more in higher interest rates – all for no reason but the bureau’s errors! And these days, identity theft also impacts about 8% of the population per year, so it’s essential you review all three credit reports thoroughly and address any errors. If you don’t know exactly what’s hurting you and what needs improvement.
If you notice that there is something incorrect listed on your credit report or a duplicate item, you should have it corrected or removed by filing a dispute with the credit bureaus. Blue Water Credit can help you dispute and remove negative and inaccurate items.
6. Keep the right mix of cards, Installment, mortgage.
Since 10% of your score is calculated by what mix of different kinds of credit you keep, it’s good to hold revolving accounts, mortgage debt, and installment debt, if possible. But it’s also important you don’t become too imbalanced with what accounts you have open, like using too many credit cards, because FICO may ding you. Try to use only one or two cards with high balances on a regular basis.
Consumers with FICO scores above 760 have, on average, six accounts that are currently “paid as agreed” and an average of 3 accounts with a balance. Those with a mortgage and installment loan in good standing also show a strong mix of credit use, improving their score.
7. Check with your creditors for lower interest rates, offers, and higher credit limits.
One way some people try to increase their credit score is by increasing their debt to total credit ratio. These days, credit card companies often mail offers to expand your available debt based on good practices. Take them up on it, but don’t charge more or use the added debt. By keeping the same low balance with a higher total credit limit, your ratios look much better to FICO, improving your score by sometimes up to 100 points! Also, instead of shopping around and opening and closing cards to achieve better interest rates, call up your cards or creditors every six months or so and ask if they can lower your interest rates or offer anything to save you money, possibly even consolidating other unwanted cards.
