The following is a guest post from YFS, the owner and author of Your Finances Simplified. He was born and raised in West Philadelphia and is now a financial adviser, IT contractor, landlord, and treasurer of a non-profit. He created his blog partly due to his desire to help people with their finances. Join YFS’s mailing list for straight forward easy to understand financial advice by clicking here.
Improving your credit score seems like it should be a fairly easy thing. Pay your bills on time, and you should have a good credit score, right? Well, that is not always the case. While it is always a good idea to pay your bills and to pay them on time, simply paying on time will not always guarantee a great credit score because other factors are involved.
Credit Scoring
Credit scoring is somewhat of a mysterious realm, and the people who score your credit are not letting the mere mortals in on their secrets. These people put your information into their system, and then they give you a number. The FICO score is the most common, and it ranges from 300 (bad credit) to 850 (excellent credit). Banks and other lenders check your credit score to determine your creditworthiness. Your credit score, in part, helps determine how much money a bank will lend you. This is important when you want to make a big purchase like a car or a house.
Due to the mystery surrounding credit scoring, it is not exactly clear what improves your credit score. Nonetheless, there are some general tips that are likely to improve your credit score, and many of them are good habits. Some of the following tips are good common sense, while others are less readily apparent. These tips will also be helpful if you want to repair your credit after a bankruptcy or want to have good credit to buy a foreclosure.
1. Number of Credit Accounts – In order to have a credit score, you have to have open lines of credit. This generally comes in the form of credit cards, and it is thought that having around five or six credit open credit accounts is best for your credit score. Anything you finance, such as a car or your college education, is a form of credit.
2. Balances and Limits – On one hand, just having open credit accounts is not the best way to improve your score—you need to have a balance on the credit account for it to be as useful as possible. So, while having an open credit account is good, having an active credit account (one with a balance) is better. On the other hand, having a balance on your account that is close to the limit (especially multiple balances that are close to the limit) is not good for your score.
3. Payments – As discussed, paying your bills is important. Late payments will negatively affect your credit score. So, you should be sure to pay everything, student loans, mortgages, etc, on time when possible. If you ever have trouble making payments, you should contact your credit company. For example, if you are unemployed, you can often defer your student loans for a time.
Also, if you do have late payments, their effect will be reduced over time. For example, late payments last year will be less important than late payments last month.
4. Credit Inquiries – Every time you have your credit checked, it will affect your score. However, this should not stop you from checking out a few lenders if you are preparing to buy a home, for example. Also, you checking your score on your own does not affect your score.
5. The Credit Score Killers – Certain things, such as tax liens, collections, multiple late payments, and foreclosures will kill your credit score. Bankruptcy will negatively affect your score for years.
The Bottom Line: The best thing for your credit score is to have multiple credit accounts with relatively low balances, to pay your bills on time, and to avoid the credit score killers.
Have you worked to improve your credit score? What did you do to improve your score?
I totally get the whole idea of improving the credit score, but sometimes it seems to be a little out of place with the idea of just knocking out the cards completely. I mean, once I get my credit card knocked out, I’m planning to tear it up and not get another one. Was going to have a little fire with my credit card and accursed cell phone.
I wish the system was revamped to compensate for people with credit card balances that have been paid off. It seems like you are penalized for paying off a balance, when in fact, it is a smart financial move.
I hate the credit score mystery.
I’ve never been late, pay off my credit cards every month (I use two and the others just sit in a safe) and almost have my car paid off and my score is around 780-790. I should be at 850!
I wonder if Emily is my long lost sister! Haha
@ Emily,
Keep in mind the word credit goes a whole lot further than credit cards. Also, as long as you don’t cancel the credit card your credit score should be fine. You may not need a credit card but you sure do need credit. Especially, if you ever plan on getting car insurance, a mortgage, an auto loan etc etc etc…
@ MoneyForCollegePro
The system is setup to reward you for paying off your credit balance. That’s what the utilization part of the credit score is about. If you keep your utilization of the credit limit to 10% or less you are rewarded for it. Max out your cards and you get hit hard.
@ David
That’s like complaining about a getting a A instead of a A+. You still get the best of the best rates. Having the best possible score doesn’t matter when you already get the best a company can offer.
We’re both trying to improve our scores. We went so long without credit cards, but have never carried a balance or been late.
Great tips. My score used to be great. Notice the operative word.
Yes. By building credit, it’s hard to get a home loan when you don’t have any real credit history (one credit card through college).
@ Michelle,
That’s what I do. I put everything on my credit card (based on my spending plan of course) and pay in full every month. I basically get a 45 day 0% interest loan, reward points and fraud protection for free!
@ Jai,
What happened?
@ Jenna,
You’re absolutely right. Having no credit is just as bad as having bad credit. Though I wouldn’t recommend getting a auto loan or any other installment loan to build credit. I would recommend getting a credit card (not a store card) to build a credit line. You don’t even have to use it. You just need to have it and ensure that the issuer doesn’t close it.
Great tips! One great way to improve your score is to call the credit bureaus if there is a mistake on your report. Also, you get a better score for having secured lines of credit (like a car loan) than for having unsecured lines (like credit cards).
@YFS
I understand I get the best rates, but if I can get a score that is 100% then that’s the target I want to hit!
Getting an A is great, but getting an A+ is even better!
@Christa,
Good point. A great way to have the best credit is to have a mix of different credit lines. Installment (car, student loans, mortgage) and Revolving (credit cards). I just hope people don’t go out and get installment loans just to improve credit. Installment loans come with guaranteed interest payments or the dreaded 0% installment loan which comes with possibly higher principal.
Thanks for pointing out what helps and what doesn’t hurts. It never hurts to be reminded.
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