A good credit score is worth its weight in gold. A higher score leads to faster loan approvals and lower interest rates. In today's competitive climate, a good credit score can be the difference between receiving a job offer or a rejection letter. Most Americans want a higher score because it opens financial doors for them, but it requires a balancing act of several factors. Below are some tips for raising your credit score.
Pay Your Bills On Time
Your payment history accounts for 35% of your FICO score, according to Fair Isaac Corporation, the inventors of the FICO scoring model. Since it's such a large percentage of your score, this is one contributing factor that you can't afford to overlook. It's imperative that all bills are paid on time every month. If you have online access to your accounts, you can actually pay your bill before the statement posts, which can reduce the amount of interest charged on the account. The most important step, however, is to make your payments in a timely manner.
Keep Your Balances Low
The second largest factor in your credit score is the amount of debt that you carry; this accounts for 30% of your FICO score. The goal is to keep your debt as low as possible, especially credit card balances. If your credit card balance is the same as your credit limit, you're maxed out; this will drop your score. Simply transferring debt from one credit card to another will not improve your score since this tactic doesn't reduce the amount of debt owed. In addition, this factor takes into account balances on car loans, student loans, mortgages, etc. The more you reduce your overall debt load, the more your score will rise.
Reestablish Your Credit
If you have a low score because of past credit problems, reestablish your credit by strategically opening a new account. Part of what constitutes a high score with FICO is payment history. If your report only contains past negatives, such as charge-offs, closed accounts, repossessions, etc., you will need the addition of new payment history to offset the old. Over time, this new history will outweigh the bad. The older a negative item becomes, the less of an impact it has on your credit score.
Don't Open Too Many New Accounts At Once
Another 25% of your FICO score is length of credit history, which is 15%, and new accounts, which is 10%. This number reflects the average amount of time that all of your accounts have been open and the number of new accounts that you have recently acquired. The two parts work hand in hand. FICO considers a long credit history as an indicator of stability, so the longer your credit history the higher your score will be. It also encourages you to open new accounts periodically. Be careful though: opening several new accounts in a short period of time will decrease the average length of your credit history and thus decrease your score in the process. Only open new accounts when you need them. It's worth noting here that closing older accounts may also lower your credit score because that too will shorten your credit history. Even if you don't use the old credit cards anymore, leave them open to protect your FICO standing.
Vary the Types of Credit That You Have
The final 10% of your FICO score takes into account your ability to manage various types of credit: mortgage, auto loan, personal loan, credit cards, etc. Having only one type is more risky than having a mix of them. According to FICO, having installment loans as well as credit cards will raise your score. Again, don't take out new credit just to have a better mix. Too many new accounts will increase the number of inquiries on your report, shorten the overall length of your score and increase your total debt load. If you need an installment loan, having one may raise your score but it's not wise to take on new debt just to have a different trade line on your credit report.
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