What is a credit score and why is it so important?

A credit score is a three-digit number, ranging from 300 to 850 (the higher the score, the better the credit rating), based on your bill-paying history and debt profile that is reflected in your consumer credit report. Your credit score will determine the interest rates you will pay on credit cards and car loans, whether or not you will qualify to purchase a home, and even the availability and cost of your insurance.

1. Pay Your Bills on Time and DO NOT Let Any Balances go to Collections

One or two late payments here or there may not seem like a huge deal, but, your creditors can show those delinquencies on your credit report. And what’s worse than your credit report showing late payments? Accounts going to collections. If you have an overwhelming bill – whether it be a credit card, medical bill or mortgage – contact the lender directly and set up a payment plan that you can afford. They don’t want your account going to collections either because they know they will only receive a fraction of what you owe if you do. Accumulating negative listings can quickly reduce your credit score and they are a lot harder to get rid of than simply paying down debt – they remain on your credit report for 7 years.

2. Pay Down Your Credit Cards!

Paying off any type of debt (car loan, student loan, mortgage, etc) will always strengthen your credit report and hence, raise your credit score. However, paying down – and paying off – credit cards can raise your credit score significantly within much shorter time frames. Depending on how much you are paying off and how fast, you may see notable increases in your credit score within months as the credit bureaus update your report every 30 days. The greater the gap between how much credit you are using and amount of credit you have available (aka credit limits), the better your credit score will be. Keeping each of your revolving accounts (i.e. credit cards) balances below 30% of your limit, will ensure a higher credit score.

3. Reduce Your Debt-to-Income Ratio

How much money you owe versus how much money you make affects your credit score. The greater the income and the lesser the debt, the higher the credit score. So if that newborn on the way wasn’t enough of a motivator to increase your income, wanting to raise your credit score will be! But in rough economic times like these when it’s not that easy to increase your income, the obvious alternative is to reduce your outstanding debt. Take note however, if you continue to use your credit cards while paying them off, your amount of debt relative to your income won’t improve.

4. DO NOT (Consistently) Use All of Your Credit Line Every Month

While in tough times and isolated circumstances it isn’t always realistic, nevertheless, accruing large balances on your credit cards and credit lines can hurt your credit score, regardless of whether you pay your balances in full each month. What’s reported to the credit bureaus, and therefore assessed into your credit score, are the balances on your credit card statements. The amount of your payment towards the balance during that same billing cycle isn’t taken into consideration. So, if you continuously charge $5000 on a credit card with a credit limit of $5000 each month, it will hurt your credit score even if you pay it all off each month because you don’t have a billing statement reporting a zero balance. That’s not to say paying off your balances each month isn’t a good idea because it 100% is, just don’t make this particular approach a habit. Consider limiting your charges to 30% or less of your credit line’s limit or make sure your statements are reflecting low-to-zero balances, as it will generally increase your credit score as opposed to lowering it.

5. Check Your Credit Limits

As stated earlier, the greater the gap between how much credit you are using and amount of credit you have available (aka credit limits), the better your credit score will be. Make sure your credit reports show your correct credit limits and be wary of credit-card issuers who do not report consumer’s credit limits, as they may cause artificial decline in your credit score.

6. You’ve Shaped Up, Ask Creditors to Exonerate Past Mistakes

If you’ve had a late payment or two with a lender, but have been a loyal and first-class consumer since, you might be able to get them to erase that troublesome negative listing on your credit history. It is referred to as a “goodwill adjustment” and you will most likely have to do send it in writing. There is no guarantee that the creditor grant the adjustment, but it doesn’t hurt to ask and it can be extremely effective in reviving your credit score.

7. Play Dirty: Dispute Old Negative Listings

You can dispute old negative listings with either the original creditor or collections agency. Dispute it as unjust (your insurance company took too long to pay the medical bill, etc) or simply that it is incorrect. The older and smaller the account, the more likely the records won’t be able to be verified. In addition, the silver lining of the recent bank failures and consolidations is this: lost and poorly managed account records.

8. Good History + Stability = Creditworthiness

The older the credit history, the better. So, when you pay off that once bothersome credit card, don’t close the account for two reasons: 1. it keeps your balance-to-credit limit gap higher and 2. Maintaining longstanding accounts positively affects your credit score. Inversely, constantly opening and closing credit cards can negatively affect your credit score. In the opposing situation, if you have an old credit card you haven’t used in years it would be a good idea to charge a small balance every once in awhile and then pay it off. If there isn’t any activity on your credit card the credit issuer may stop keeping your account up-to-date with the credit bureaus and won’t be considered as heavily in calculating your credit score as your other active accounts (i.e. car loan or mortgage). While employment and residence stability does not affect your credit score, it does influence potential lenders when they review your credit report.

9. Last But Not Least, Check Your Credit Reports for Accuracy

The last thing you want is to have an artificially lower credit score due to errors on your credit report. Credit bureaus and creditors aren’t perfect. Keep an eye out for the following marks that can hurt your credit:

• Negative marks such as late payments, charge-offs and collections that aren’t accurate.
• Any accounts listed as anything other than “current” or “paid as agreed” if you have been paying on time or in full.
• Negative listings older than 7 years (10 years for certain types of bankruptcies) that should have been automatically removed from your credit report.
• Any account listed as “closed by the credit grantor” when it wasn’t. This is a big negative mark.
• Accounts listed as unpaid that were already included in a bankruptcy.