How to Get a Good Credit Score
Lenders use credit scores to determine how likely an applicant is to repay a loan. The higher the credit score, the less of a risk the individual is deemed to be.
Someone who has a good credit score has a better chance of being approved for a loan than someone who doesn’t. Although there are loans for people with credit scores in the “fair” and “poor” credit ranges, they come with higher interest rates and less desirable terms. A “good,” “very good” or “exceptional” credit score, on the other hand, comes with more favorable terms that save the borrower money in the long run.
While each of the three major credit reporting agencies — Experian, TransUnion and Equifax — uses a different model and has its own credit score ranges, a score between 700 and 749 is generally considered good, and anything above 750 is excellent. Typically, individuals with higher credit scores have similar habits.
Here are eight smart credit practices you can use to try to improve your score.
- 8 habits for higher credit scores
- Bottom line: Max out your credit score, not your credit cards
8 habits for higher credit scores
1. Make payments on time, all the time
Your payment history makes up 35% of your credit score. This is the largest factor, perhaps because a person’s past behaviors often predict their future behaviors. Credit reporting agencies will look at whether you pay your bills before their due date, whether you have any delinquent accounts, whether you have any accounts in collections and whether you have a bankruptcy on your record.
2. Set auto payments and reminders
Life gets busy, and it can be hard to keep up with all your bills. Consumers with high credit scores know this and take steps to avoid missing a payment. For example, you can set up automatic payments for fixed expenses like insurance, mortgage and auto payments. You can also take advantage of payment reminders for varied expenses, such as credit card and electric bills. These reminders are usually available through billing companies’ online payment portals or downloadable apps.
3. Keep your credit utilization rate low
Another big chunk of your credit score (30%) is made up of how much credit you utilize. Companies use the following formula to determine your credit utilization ratio: total debt divided by your total available credit. For example, if your combined available credit was $50,000, but you were only using $10,000 of this amount, your credit utilization ratio would be 20% (10,000/50,000).
Having a low credit utilization ratio is key to obtaining a good or excellent credit score, as it demonstrates you are responsible with your finances and not spending more than you can afford. Typically, a total credit utilization ratio below 30% is recommended.
4. Keep applications for credit to a minimum
Whether you apply for a mortgage, auto loan, credit card, student loan or any other kind of loan, the lender will run a hard credit inquiry to check your credit score. This is true whether you are opening a new account or simply requesting a credit limit increase. Having too many of these inquiries can have a negative impact on your credit score.
There are also soft credit inquiries that do not affect your credit score. These tend to occur when checking your own credit, applying for a government license or opening a new bank account. Many individuals who have good-to-excellent credit take the time to confirm whether an action will result in a soft or hard pull, ensuring hard inquiries are kept to a minimum.
5. Keep credit card balances low or nonexistent
Interest rates on credit cards are typically high: The average hit 16.86% on accounts assessed interest in November 2018, according to the Federal Reserve. To avoid paying interest, consumers with good credit know to keep their credit card balances low or nonexistent. It is recommended you pay off your balances each month. A balance would rack up more interest that will make it harder to keep up with monthly payments.
“When paying your credit card, split the payment in one month,” said Sherrie A. Clarke, CEO and credit specialist at Clarke Financial Group. While it won’t directly boost your score, making multiple payments will help ensure you don’t miss a payment and make it more likely you’ll at least pay off the minimum balance due.
6. Choose the right cards
There are plenty of credit cards from which to choose, which means consumers can shop around for a card tailored to their needs. For example, cashback rewards cards are great because any redeemed money can be used for a future loan payment or another purpose. A travel rewards card, meanwhile, provides perks and discounts that can lead to upgrades or savings that can be used to pay bills on time.
There are also credit cards for individuals who need to build or rebuild their credit, such as a secured credit card. “With the secured credit card, you ‘put up’ the money to establish your credit limit,” Clarke explained, adding that consumers should “be sure to pay on time and avoid going over their limit.”
7. Mix up your credit
The combination of different types of credit makes up 10% of your credit score. For most consumers, it helps to have a mix of installment loans — like student loans, mortgages and personal loans — as well as some revolving lines of credit, such as credit cards and retail accounts.
8. Check out your credit reports
“It’s important that individuals utilize the resources available to them to review and dispute erroneous, outdated or unverifiable information on their credit profiles that can cause their credit scores to plummet,” Clarke said.
Under the Fair Credit Reporting Act (FCRA), consumers are permitted to request a copy of their credit report. You can get one free copy from each reporting agency every 12 months at AnnualCreditReport.com. Or you can pay a small fee to get a report directly from one of the reporting agencies at any time. Once you get the report, check it for any inaccuracies. If you find an error, dispute it right away.
Bottom line: Max out your credit score, not your credit cards
Credit score calculations may be complicated, but getting a good credit score isn’t. Incorporating responsible credit habits puts you in the driver’s seat. As you begin to take control of your credit, your score will gradually improve. Soon, you’ll reap all the benefits of a good credit score.