Your credit score is a three-digit number between 300 and 850, generated by a mathematical algorithm (a mostly secret formula) based on information in your credit report compared with information on tens of millions of other people. The resulting number is said to be a highly accurate prediction of how likely you are to pay your bills.
If it sounds boring and unimportant, you couldn’t be more wrong. Credit scores are used extensively these days. If you rent an apartment, get braces, buy a cellphone service, apply for a job or call to get utilities connected, there’s a good chance your report and score will be pulled.
If you have an existing credit card, the issuer is likely to look at your credit score to decide whether to decrease your credit limit or charge you a higher interest rate. The higher the number, the better you look to lenders. People with the highest scores get the lowest interest rates. And, we hear, they’re getting the jobs.
Know your score. We can get our credit report free at AnnualCreditReport.com. Now we can get our credit scores for free, too. Check your credit scores anytime, anywhere, and never pay for it at CreditKarma.com. You will need to create a simple password-protected account, no credit card required.
Here are the ways to improve our credit scores:
Pay your bills on time. Making your credit payments on time is one of the biggest contributing factors to your credit score. Delinquent payments have a major negative impact on your credit score. If you have missed payments, get current and stay current. The longer you pay your bills on time, the better your credit score. Be aware, however, that paying off a collection account or bringing an account current will not remove it from your credit report.
Keep balances low on revolving credit. Using more than 30 percent of your available credit on your credit cards brings down your credit score. This applies to individual accounts and when you add up all of your available credit and compare it with how much you are using at any given day during the billing cycle.
Pay off debt rather than moving it around. The most effective way to improve your credit score is by paying down your revolving credit. Getting your balances down to zero will send your score soaring.
Don’t close unused credit cards. Closing accounts might sound like a great short-term strategy to raise your score, but it’s not. This will close the gap between your outstanding debt (the amount of credit you are using) and the total amount available. Instead, use a clear strategy to close accounts, but only as it will not impact the gap between what you owe and the amount of credit available.
Don’t open new accounts. More credit might seem wise in order to increase your ratio, but it will be seen as a negative to your score. New, or “young,” accounts are not useful in credit scoring because they dilute your average account age. Unless it’s a dire emergency, do not open new credit accounts.
Work on longevity. Make sure you maintain your oldest accounts. A great deal of weight is given to longevity, so the oldest account you have is the most valuable.
Stick with it. As with a lot of things in life, time is the best healer. Do the right thing by managing your finances responsibly and your credit score will take care of itself.
Get help! If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor. But beware. There are lots of shysters out there masquerading as negotiators, settlers and credit counselors.
You can find a legitimate certified credit counselor at the National Foundation for Credit Counseling website, or by calling 800-338-2227. The NFCC is the nation’s first and largest nonprofit dedicated to improving people’s financial well-being.
NFCC is legit. In fact, NFCC is the only credit counseling organization I recommend and endorse. It has been around for many years and has earned the highest reputation. NFCC is a wonderful organization you can trust that has come to the rescue of thousands of my readers over the years. It’s ready to help you, too!
Readers ask ...
Dear Mary: Should I cancel old credit cards that I no longer use?
Dear Stephanie: No. It seems like the logical thing to do, but if you close old accounts, you may lower your credit score. Two of the factors used to calculate that score are history (how long you’ve had credit) and debt-to-limit ratio (how much of your available credit is being used at any given time).
Closing an old account can shorten your credit history and increase your debt-to-limit ratio. Both will hurt your credit score.
Leave them alone unless there is a compelling reason to keep them, like an annual fee or a child who is a co-signer and might go on a spending spree.
Here’s an important tip: For accounts you want to keep active, use them three or four times a year for even a very small purchase. Then pay the balance in full immediately. Banks don’t want inactive accounts, and they are aggressively closing them.
Mary Hunt writes this column for Creators Syndicate. She is the founder of www.EverydayCheapskate.com, a lifestyle blog, and the author of “Debt-Proof Living. Submit comments or tips or address questions on her website. She will answer questions of general interest via this column, but letters cannot be answered individually.
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