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All Contents © 2017The Kiplinger Washington Editors
By Lisa Gerstner, Contributing Editor
| March 2017
Want to improve your credit score? Take a page from the best. People with excellent scores know that following a few basic rules is the key to success. Adopting their habits could boost your score into the stratosphere, opening the door to the best interest rates and terms on loans. And capturing the lowest loan rates can save you a bundle of money in the long run.
The two big consumer credit scoring companies are FICO, whose scores are most commonly used in lending decisions, and VantageScore, a company created by the three major credit bureaus (Equifax, Experian and TransUnion) whose scores have been gaining ground among lenders. The latest models of both scores operate on a scale of 300 to 850. Generally, a score of 750 or higher is considered excellent.
Once you know your score, you can start taking steps to raise it by following these seven habits of people with excellent credit scores.
The most influential factor in your credit score is your payment history, so staying on top of bills is crucial. Just one late payment (overdue by 30 days or more) can damage your score. FICO recently reviewed the profiles of consumers it calls high achievers (those with scores in the 750-850 range) and found that 72% of those with scores from 750 to 799—and 95% of those with scores of 800 or higher—had no late payments on their credit reports.
To ensure that you pay bills on time, consider signing up for automatic payments from your bank account or credit card. Or set up reminders of upcoming due dates on your smartphone (or mark your paper calendar), suggests Heather Battison, vice president of TransUnion. Budgeting site Mint.com can also alert you when bills are coming due for accounts you link to its tool.
The amount you owe on your credit cards as a proportion of your card limits—known as your credit utilization ratio—is another important score component. FICO high achievers with scores from 750 to 799 use a median 10% of the credit available to them, and those with scores of 800 or higher use just 4%. There are no hard-and-fast rules to pinpoint the optimum ratio, says Can Arkali, principal scientist at FICO. But in general, the lower your utilization, the better. As a guideline, experts often recommend using no more than 30% of the credit available to you to show lenders that you can manage credit responsibly. But if raising your credit score is a priority, keep utilization under 10% on each credit card you have, says Beverly Harzog, consumer credit expert and author of The Debt Escape Plan.
Paying down your credit card balances multiple times per month can help keep your utilization down, says Jeanine Skowronski, managing editor at Credit.com. Your card issuer may allow you to set up e-mail or text message notifications when your balance reaches a level that you specify. Another tactic: Ask your card issuer to raise your credit limit. If you've been using the card for several months and paying your bills on time, the issuer may grant your request. But be sure that you have the discipline not to increase your spending, too, cautions Harzog.
Even if you stop using a credit card, it's often smart to keep it open so your score benefits from the available credit. However, if the card tempts you to overspend or carries an annual fee, closing it may be better.
People with FICO scores of 800 or higher have a median total revolving credit balance of $1,446, compared with $2,040 for the U.S. population overall (who have an average score of 700). In a study of its users, Credit Sesame, which provides free VantageScore credit scores to consumers, found that those with scores of 800 or higher had an overall average credit card balance of $1,181; those with scores of 600 or lower carried $3,625.
The takeaway? Maintain firm control over your spending, charging only what you can afford to pay in full each month on your credit cards. That way, you'll also avoid incurring interest, which can quickly pile up.
Having several years of credit usage under your belt also elevates your score. The average age of revolving credit accounts among FICO high achievers is a little more than nine years for those in the 750-799 range and almost 12 years for higher scorers. That may give older folks a leg up, but "it's important to note that you can still have a good score even if you're not a longtime user of credit," says Skowronski. Length of credit history accounts for 15% of your FICO score, compared with 35% for payment history and 30% for amounts owed (including credit utilization). If you are just starting to establish a credit history, set yourself up for success by using a credit card to make small, manageable purchases, such as gas and groceries, says Battison. She also suggests that renters ask their landlords to report rent payments to the credit bureaus to help start a credit history.
Opening new credit accounts may shorten the average age of your credit history, but closing accounts won't affect account age right away. Accounts that were closed in good standing may remain on your credit report for up to 10 years. Still, it's not a bad idea to keep your oldest credit cards open to help maintain your credit history.
Applying for several credit cards in a short period sends a signal that you may be a risky credit prospect. Each time a potential lender checks your credit, the action shows up on your report as an "inquiry" -- and the appearance of several inquiries at once can ding your credit score. (If you're shopping for a mortgage, auto loan or student loan, however, FICO ignores all inquiries that such lenders have made within the past 30 days. VantageScore counts auto loan and mortgage inquiries made within two weeks of one another as a single inquiry.)
Having a mix of account types helps increase your score, and people with FICO scores of 800 or higher have a median 10 revolving credit lines on their credit reports, more than those with lower scores. If you do open new credit cards regularly, Harzog recommends waiting at least six months between applications.
Look for cards that reward your spending patterns. If you buy a lot of gas, for example, a card that pays 5% cash back on fuel purchases will serve you well. Cash-back cards often let you use the rewards you've accumulated as a statement credit toward purchases, lowering your bill. A card that carries an annual fee may be worthwhile, but first do the math to decide whether the rewards you earn will outweigh the fee. Some cards waive the annual fee for the first year, giving you time to determine whether the card works for you. (See Best Rewards Credit Cards for Your Wallet.)
If you are just getting started with credit (or bouncing back from a bankruptcy or other serious delinquency), a secured card, which requires you to make a deposit as collateral, can help you build a credit history and score. Retailers may offer you enticing discounts if you sign up for their store credit cards, and retail cards are often easier to obtain than other cards. But keep in mind that both cards often come with low credit limits—meaning that your credit utilization could easily push past the recommended 30% mark when you use the card to make purchases.
By keeping an eye on your credit report and score, you will be aware of any negative changes that pop up and can act quickly to correct them. According to a survey from credit card issuer Discover, 76% of those who had checked their credit score at least seven times in the past year saw their score improve, compared with 38% of those who had checked their score once in the previous year.
At AnnualCreditReport.com, you're entitled to a free yearly credit report from each of the three major credit agencies: Equifax, Experian and TransUnion. Scan each report, looking for possible errors or signs of fraudulent activity, such as an incorrect credit limit on a card or an account that you never opened. (If you spot a problem, you can take steps to dispute and correct it. If you suspect fraud, you should also take measures, such as enacting a fraud alert.)
A host of other websites also offer free credit scores to help you gauge where you stand. One of our favorites: CreditKarma.com, where you can view information from both your Equifax and TransUnion credit reports as well as your VantageScore from each bureau. Credit Karma also lets you sign up for alerts of changes in your TransUnion credit report. Discover Credit Scorecard offers a free FICO score (based on data from your Experian credit report) to everyone, not just Discover card customers. Your bank or credit card issuer may provide customers with free credit score updates, too.
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