There are few things we do in life that are tracked, reported and scored like that of our credit activities. But then, there are few things in life that we do that can have as far reaching consequences as the way we manage our credit. Your credit score is a key determinant in many aspects of your financial life, such as whether you can qualify for a mortgage, how much you’ll pay in interest charges, and whether you will be hired for a job. Suffice it to say, it’s important to know your score.
If it’s not what it could be, it would be very important to embark upon a plan to improve your score. And, If you think it’s where it should be, it is important to realize that your score can more easily slide backwards than it can climb upwards. Raising and maintaining a good credit score needs to be a continuous and deliberate effort. Using a systematic approach can ensure it is always moving in the right direction.
Know Your Score
You have to know the score if you expect to improve it. Consumers are able to obtain one free credit report from each of the credit bureaus once per year. You can order one directly from TransUnion, Equifax and Experian or you can go through AnnualCreditReport.com. It is recommended that you order them at different times throughout the year so you can check for changes in your report and your score. It is important to note that not all credit scores are created equal. Each of the credit bureaus have their own formula and method of scoring, and their scores may differ somewhat from the FICO score which is what the lenders use. But, at least you can use their scores to check your progress.
Clean Your Report Regularly
Reporting errors consisting of incorrect names and addresses, crossed Social Security numbers, and misreported payments or credit lines are common. Left alone, they can wreak havoc on your credit score. It is the credit bureaus legal responsibility to ensure your reports are error-free. As soon as you see an error, contact the credit bureau by letter. If they don’t correct the error immediately, you should write to the Fair Trade Commission (FTC). Eventually it will get fixed.
Use Your Credit
Some people try to “protect” their credit score by not using their credit. This could actually have the opposite effect and hurt your score. Your credit score is a measure of how well you manage credit and the credit bureaus want to see an ongoing history of payments as well as your ability to keep your debt-to-limit ratio low. Don’t close any credit accounts as that could temporarily lower your score. To keep your score moving forward, use one credit card to make your regular budgeted purchases each month, such as gas and food, and then pay off the balance in full.
Keep Balances Low
The credit bureaus also score your credit based on how much you rely upon it. Too much reliance and your score can drop. The measure they use is the ratio of your outstanding debt to your credit limit. The general rule is to keep your debt, on any one credit card, below 30%, the lower the better.
Put some Variety in Your Credit
Your score could drop if your sole source of credit comes from credit cards. The credit bureaus want to see a mix of different types of debt, such as an installment or auto loan and less reliance on revolving debt.
Apply for Credit Judiciously
Whenever you apply for credit, your credit report records a credit inquiry which, if it occurs to frequently, will lower your score. More than two inquiries in a six month period can hurt your score. Avoid opening store credit accounts just to get that extra 10% off your purchase – not worth it. And, if you really want to take advantage of a balance transfer offer, only apply once every six months.
Managing your credit and keep your score moving forward is not a full time job; however, it does require a conscious effort. Some people subscribe to credit monitoring services ($10 – $20 per month) which provide weekly or monthly tracking of your credit report and score along with any alerts to changes in your report. In addition to a much clearer picture of your credit, it helps you to automatically stay on top of it.