How to Improve Your Credit Score
3 Easy Ways to Boost Your Credit Score
A good credit score is essential to getting a decent interest rate on a loan. Here's a look at what is a good credit score and how to improve yours.
A credit score is a numerical assessment of your creditworthiness. It's a quick and easy way for banks to assess whether or not you can pay back loans.
There are many factors that go into calculating your credit score, including:
- How you pay your bills
- How much credit is available to you (on credit cards) and how much of it you use
- How long your credit history is (the longer the better)
- What type of credit you have (is it all credit cards or a mix of car loans, credit cards and mortgages?)
- How much credit have you applied for recently
So what is a good credit score? Generally, speaking a good credit score is around 680 to 720. An excellent credit score is 750 or above. Those are the numbers you need to strive for in order to get the best interest rates.
How to Improve Your Credit Score
The first step toward improving your credit score is to pay your bills on time. Your bill payment history, especially your recent bill payment history, accounts for roughly 35% of your credit score. So paying bills on time can be a big boost in improving your credit score.
Next, figure out which credit cards have the highest balances relative to the available credit. Pay those down first. For example, if you have a credit card with a $1,500 balance and $2,000 available credit and another card with a $3,000 balance and $15,000 available credit, you'd want to pay down the card with the $1,000 balance first.
That's because your credit score is based on how much credit you use as a percentage of the credit available to you. In the first example, you're using 75% of your available credit, whereas in the second example, you're only using 20% of your available credit.
Note: This is a different strategy from the traditional advice that suggests paying down cards with the highest interest rate first. You have to balance the two strategies. Obviously, if you have a card with an exorbitant rate of 25% or more, you'd want to pay that down as fast as possible.
Ideally, your credit balances should be no more than 50% of the credit available to you.
Finally, do not close out credit card accounts. Years ago, experts advised closing out credit card accounts before applying for mortgages in order to appear to have less debt and less credit available to you. But today that strategy can backfire. It's better to leave the accounts open and not use them than to close them out.
For more information, see also:
- Your Credit Score: How It Can Save You Thousands
- Five Debt Relief Tools
- Need Debt Help? How to Choose a Consumer Credit Counseling Service
- Want Credit Card Debt Relief? How to Tell if a Debt Management Plan is Right for You
