Benjamin Franklin once said, “It takes many good deeds to build a good reputation, and only one bad one to lose it.”
Financially, your reputation boils down to a three-digit number: your credit score. Each credit-related action you take is recorded, tallied, and turned into this increasingly important number.
A good credit score will help you get the best rate on a mortgage and a lot more. Insurers, cell phone providers, and a growing list of other companies base their decisions about working with you and at what rates, in part, on your credit report and/or score. More and more landlords and employers check the same information before renting you a place to live or offering you a job.
Clearly, building and maintaining a strong credit score is important. Here’s how.
Pay Your Bills on Time
Thirty-five percent of your credit score is based on your track record of paying your bills on schedule. Do all that you can to pay your bills on time.
Most credit card companies will send you an e-mail alert a week or so before your next payment is due. Paying your bills on time is so important that you should create multiple reminders. Sign up for the free alerts available to you, and add bill due dates to your calendar as well.
Be Careful About How Much Credit You Use
Thirty percent of your credit score is based on how much you owe. What is especially important is how much of your available credit you are using—your credit utilization—across all of your credit cards and on each individual card.
Using 30 percent of your available credit or less is good; 10 percent or less is ideal. This goes for people who pay their balances in full each month, as you should, not just those who carry a balance. The credit bureaus simply check to see how much credit you are using at some point each month.
Give It Time
Fifteen percent of your credit score is determined by how long you have used credit.
I’m often asked in workshops whether to close old, unused accounts. This is generally not a good idea, but not because doing so will erase your credit history. When you close an account, positive information about the account stays on your report for ten years, negative information for seven years.
The problem with closing an old account has to do with credit utilization. Closing an account lowers your total available credit, which will probably increase your utilization, and that can lower your credit score.
Be Cautious About Opening New Accounts
The amount of credit you have applied for recently impacts 10 percent of your score. Opening new credit card accounts in order to get those 10 percent discounts tends to discount your credit score.
Use Various Types of Credit
Your mix of installment loans, revolving credit, and/or a mortgage is an important part of the final 10 percent of your score. Installment loans are those with a fixed payoff period, such as a vehicle or student loan. Revolving loans are open-ended loans, such as credit cards.
Having some of each type of credit is ideal, at least according to the credit bureaus. However, I don’t recommend financing cars or college. And you do not need to carry a balance on your credit cards in order to earn a high score. You can—and should—pay your balance in full each month.
Review Your Free Credit Reports
Everyone is entitled to one free report each year from each of the three credit bureaus: Experian, Equifax, and TransUnion. Get your reports at AnnualCreditReport.com. Here’s what to look for in each of their major sections:
Credit summary. Toward the top of your Equifax report, under “Accounts,” you will see your credit utilization, or what it calls “Debt to Credit Ratio.” This is the area you can do something about to impact your score the most in the least amount of time.
If you have a high debt to credit ratio, you will raise your score if you can pay down your debt, especially credit card debt. The improvement should show up within 30 days.
Account information. Are there any accounts you don’t recognize? This could be a sign of identity theft. If you see such accounts, contact those creditors directly and let them know the accounts are not yours.
Check to see if there are any late payments noted. For Experian, you want your open account status listed as “Open/Never Late.” For Equifax, “Pays as Agreed.” For Transunion, “Paid or Paying as Agreed.”
If any accounts are listed otherwise, and you believe you have never been late with a payment, contact the creditor. Let them know you believe a mistake has been made and ask if they will change it on your credit file.
Personal information. Check to see that the following information is correct: the spelling of your name, your birth date, current and previous addresses, Social Security Number, and current and past employer information.
If you see any problems on your report, file a dispute. Instructions are on the report.
Review Your Credit Score
Your credit reports are free; your credit score might be free. Many credit card companies now provide free credit scores to their cardholders, including American Express, Discover, and others. There are some Web sites that offer free credit score estimates as well, but I recommend that you find out your FICO score. FICO stands for Fair Isaac Corporation, which is the company that created the credit score and whose scores are still the most widely used.
If you don’t have free access to your FICO score, you can buy it on Fair Isaac’s web site. You’ll have your choice of purchasing your TransUnion, Experian, or Equifax FICO score. It doesn’t really matter which one you choose; just buy one for $19.95.
Credit scores range from 300 to 850. Unlike cholesterol, the higher the number the better. Ideally, you want your score to be in the mid 700s or higher.
Two keys to a strong credit score
Credit scores have an aura of mystery. There’s no end to the articles offering this strategy or that for increasing your score.
The truth is, two very basic steps will give you the greatest impact in building and maintaining a good score: pay your bills on time and use a relatively small amount of your available credit. Focusing on those two practices will go a long way toward keeping your financial reputation—your credit score—strong.
What questions do you have about credit reports or scores?
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