A 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 to information on tens of millions of other people. Like it or not, 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 cellphone service, apply for a job or call to get utilities connected, there’s a good chance your report and score will be critiqued to qualify.
If you have a credit card, the bank or issuer of that account is likely to regularly look at your credit score and payment history to decide whether to decrease your credit limit or charge you a higher interest rate.
The higher your score, the better you look to lenders. People with the highest scores get the lowest interest rates. And they’re getting the jobs.
Know your score. You know you can get our credit reports for free at AnnualCreditReport.com. Now you can check your credit scores anytime, anywhere and never pay for them at the Credit Karma website. You will need to create a password-protected account, no credit card required. Plan to get hit up to buy all kinds of things and apply for all kinds of new credit. Just be strong: Get your free score, and move on.
How to improve your credit scores. Current estimates are that you have at least 57 credit scores out there — but only a handful of them are important to anyone. Most lenders look to your FICO score in their decision-making process. But even that is complicated because credit reporting agencies now have their own branded scores, which are based on the FICO model. So you might see that you have an Experian FICO score, for example.
If you want to look to the gold standard of credit scores, you want to track your FICO score. It is available to you for a few bucks at the website myFICO.
Pay your bills on time. Making your credit payments on time is one of the most important contributing factors to your credit scores. Delinquent payments have a major negative impact. If you have missed payments, get current and stay current. The longer you pay your bills on time, the better your credit score.
Keep balances low. Using more than 30% of your available credit on your credit cards — individual accounts and also collectively, if you have multiple accounts — brings down your credit score. Increasing the gap between your credit limits and your total revolving debt will improve your score.
Don’t close unused credit cards. Closing accounts might sound like a great short-term strategy to raise your score, but it’s not if you are carrying revolving credit card debt. This will close the gap between your outstanding debt (the amount of credit you are using) and the total amount available.
Don’t open new accounts. More credit might seem wise in order to increase your available credit-to-debt 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.
Get help! If you are having trouble making ends meet, contact your creditors, or see a legitimate credit counselor. This won’t rebuild your credit score immediately, but if you can begin to manage your credit and pay on time, your score should increase over time. And seeking assistance from a credit counseling service will not hurt your credit scores. 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 Federation for Credit Counselors, the nation’s first and largest nonprofit dedicated to improving people’s financial well-being. Go to https://www.NFCC.org to get immediate help online, or call (800) 388-2227 to be connected with a counselor near you.
The National Federation for Credit Counselors is legit. In fact, it is the only credit counseling organization I recommend and endorse. It has been around for many years and has earned the highest reputation. It is a wonderful organization you can trust that has come to the rescue of thousands of my readers over the years. It is ready to help you, too!
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.