A good credit score is a valuable asset when it comes to your financial life. It can help you get a lower interest rate on all kinds of loans and credit cards, and may even assist you in getting a better job. (Many employers check credit scores these days before making a hiring decision.) If you have a bad or fair credit score, or even just a good score instead of an excellent one, there are ways that you can add some points to your current number.
You first need to understand how your credit score is calculated. According to FICO (the company that developed the scoring mechanism used by most major financial institutions), your credit score is based:
- 35 percent on your payment history
- 30 percent on the amounts you owe
- 15 percent on the length of your credit history
- 10 percent on how much new credit you have
- 10 percent on the types of credit that you have
There’s a direct correlation between credit cards and a credit score in all of these categories.
- Payment history. If you want to improve your credit score, pay your credit card bills on time. This is a no-brainer. The credit bureaus want to know that you are responsible enough to handle repayment of your debts (like credit card bills) in a timely manner. Stay on top of those payments and your score will go up. Fall behind, and your credit score will take a hit.
You’ll also want to make at least the minimum payment on your credit card bill each month. When you’re applying for a credit card, you’re agreeing to put at least this minimal amount of money each month towards paying off your debt to the credit card issuer. If you don’t meet that obligation, your score will go down and you’ll be less likely to qualify for additional credit in the future.
- The amount you owe. If you’re not careful, credit card debt can mount up quickly and the credit bureaus may get nervous about your ability to repay all of your bills.
To improve your credit score, keep an eye on your debt-to-income ratio, which is the amount of money you make versus the total amount of money that you owe on your credit cards, mortgage, car payment, school loans, etc. Credit bureaus like to see a debt-to-income ratio of no more than 36 percent; if you want to increase your score, try reducing it to 30 percent or below.
- Length of your credit history. If you can qualify for a credit card at an early age, and feel confident that you’ll be able to make payments and make them on time, go for it. Even if your credit limit isn’t very high, you’ll be establishing yourself over time as a reliable credit user, and that can give your credit score a boost.
- How much new credit you have. It’s never a good idea to apply for a lot of credit at the same time, because lenders get nervous about your ability to pay it all back. Too much new credit can have a negative effect on your credit score.
Before you apply for a credit card, think carefully about what you want most, whether that is rewards, airline miles card or a 0 percent interest introductory rate and/or a 0 percent balance transfer rate. Apply only for that card. Wait several months before you consider trying to qualify for another.
- The type of credit you have. Credit bureaus like to see a credit mix: credit cards, auto loans, student loans, mortgage, line of credit, etc. While you shouldn’t apply for a credit card that you don’t want just to have that mix, if you don’t already have a credit card and are considering getting one, it may boost your score a few points.