Build Your Best Credit Score
Here are some ways you can build your credit score:
1. Monitor your credit report
Check your free annual credit report at www.annualcreditreport.com. Beware of copycat sites. You are entitled to a free annual report from each of the
three credit reporting companies: Equifax, Experian, and TransUnion. Check your credit
report from a different company every few months to monitor your credit report throughout
the year. The report contains information from current and past creditors including
lenders, amount of installment loan, limits for revolving credit, frequency and amount
of payments, and late or missing payments. The report will also show your name, address,
and employer – current and previous. Check for accuracy. If you find an error, notify
the credit reporting company and the lender. If you suspect fraud, contact the Federal
2. Check your credit score
Your annual credit report is free but you must purchase your credit score. Credit scores are available from a variety of different sources. Lenders rely on scores from the three main credit reporting agencies or they may have their own. The scores tend to be close. You typically won’t find vast differences from one agency to the next because they are all based on your credit management behavior. Most scoring systems range from 300 to 850. Higher scores qualify for lower interest rates. Most consumers have scores in the 600’s or 700’s. Check your score at www.annualcreditreport.com. Other sites may offer a free credit score but be aware that it may differ from the scores provided by the major credit reporting bureaus. Watch out for hidden costs such as credit monitoring offers. You need only purchase your one-time score but many websites will try to have you opt-in to a monthly fee to monitor your credit, email a monthly report, or some other service.
3. Understand the scoring system
Want to improve your score? You’ll need to know what factors influence the score. There are several good practices that are critical for any credit score such as making regular, on-time payments; maintaining a low debt-to-income ratio; and having a long history of responsible use of credit. There are some variations among types of credit scores. The most commonly used types of credit scores are FICO® and VantageScore.
FICO® Scores range from 300-850. There are no hard rules about a specific number that ranks you as a good credit risk but, generally, credit scores in the mid-700’s and above are considered excellent. Credit scores in the mid-600’s and below are often considered higher risk and these consumers may not qualify for conventional loans.
FICO® Scores are determined by the following factors and detailed by percentage of weight below:
- credit payment history
- amounts owed
- length of credit history
- mix of credit
- new credit
35% Credit Payment History
A long history of making regular, on-time payments is the main component of a good credit score. A few missed or late payments may not be a deal-breaker for a good score. An overall good credit history can outweigh one or two instances of late credit card payments. However, having no late payments in your credit report doesn't mean your score will be a perfect 850 either. There are other factors that determine a credit score.
Account types considered for credit history could include:
- Credit cards (Visa, MasterCard, American Express, Discover, etc.)
- Retail accounts (credit from stores where you shop, like department store credit cards)
- Installment loans (loans where you make regular payments, like car loans)
- Finance company accounts
- Mortgage loans
30% Amounts Owed
Too much credit may mean the consumer is overextended and at risk of being to repay debts. Scores are influenced by the total amount owed and the amounts owed by types of accounts (credit cards or installment loans).
The credit utilization ratio on revolving accounts is the percentage of available credit being used.
Maxing out your cards can lower your credit score. Credit card lenders often report our monthly statement amount to the credit bureau; so, even if you pay off the balance every month, it may not be reflected on your credit report.
Paying down installment loans is a good sign that you're able and willing to manage
and repay debt. For example, if you borrowed $10,000 to buy a car and you have paid
back $2,000, you still owe (with interest) more than 80% of the original loan.
15% Length of Credit History
You have to use credit to have a credit history. The longer your positive credit history, the better. You can bounce back from a bad credit history and show a recent good credit history. Late payment behavior in the past can be overcome; re-establishing credit and making payments on time will raise a credit score over time.
10% Credit Mix
Credit cards, retail accounts, installment loans, finance company accounts and mortgage loans are different types of credit. Having credit cards and installment loans with a good credit history will raise your score. Strive for a healthy balance of types of credit. Too many credit cards or having only installment loans can both lower a score. A closed account will still show up on your credit report and continue to affect your score.
10% New Credit
Avoid opening several new accounts over a short period of time. New accounts lower the average account age, lowering your score. An inquiry is when a lender makes a request for your credit report or score. Inquiries remain on your credit report for two years, although FICO® Scores only consider inquiries from the last 12 months. FICO Scores have been carefully designed to count only those inquiries that truly impact credit risk, as not all inquiries are related to credit risk.
If you apply for several new credit cards within a short period of time, multiple requests for your credit report information (inquiries) will appear on your report. Shopping for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.
It’s OK to request and check your own credit report. Checking your credit report won’t affect your FICO® Scores, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers, such as myFICO.
The earlier versions of VantageScore (Model 1 and Model 2) ranged from 501 to 990.
The newest versions of VantageScore (Model 3 and Model 4) range from 300 to 850.
• Payment History – make regular, on-time payments.
• Age and Type of Credit – use a variety of types of credit.
• Percentage of Credit Limit Used – keep balances low, less than 30% of credit limits.
• Total Balances/Debt – reduce the amount of debt you owe
• Recent Credit Behavior and Inquiries – avoid opening several new accounts over a brief period of time.
• Available Credit – only open the amount of credit you need.
Find your motivation
Money itself is not the end goal. The purpose of money and all of our resources is to create the life you want to live. How do you envision your life in 5 years? 10 years? 20 years? What’s important to you? What are your values? Money management is easier when you have specific goals.
Evaluate your goals.
Goals give you direction and motivation for the use of your time. Take some quiet time to think about what you really want in your life. Step back and reflect on your personal values. List the steps it would take to actively work on the accomplishment of these goals. Make your goals, and the steps to achieve them, as specific as possible.
Set short-term and longer-term goals.
For financial goals, we often say that short-term goals are less than one year, long-term goals are 5 years or longer, and medium-term goals are in-between. You may set different time frames for other categories. For example, if your goal was to buy a new car– your short term goal might be to save a certain amount from each paycheck. Your long-term goal might be to save a certain amount for a down payment or to pay full price for the car.
Write down your goals.
You’re more likely to achieve your goals if they are written down, stated in positive terms. Place your written goals where you can see them often. Most of your goals should be realistic and attainable but it’s okay to have some dream goals too. Re-evaluate along the way to determine if your goals have changed. You can give yourself permission to release goals if you decide it’s not what you really want.
Identify money wasters.
We all have little things we do during the week that take resources away from working toward our goals. These can be things like morning coffee stops, impulse buying, shopping for entertainment, etc. Often, we don’t even realize how much money we waste. A good way to discover spending leaks is to keep a log or journal. Keep a detailed spending record for an entire month. Try to write down everything you purchase and the amount you spent. At the end of the month, review your spending log/journal. Think of ways to reduce or eliminate unnecessary spending so you will have more money to use towards your goals.
Check your debt to disposable income ratio
One way to check if your non-mortgage debt is too high is to calculate a debt to disposable income ratio. Add the total of all monthly debt payments (excluding mortgage); then, divide by your net disposable income. Less than 10 percent is best. Higher than 16% and you may be getting in over your head. Aim for a ratio of 15% or lower.
Are you able to manage your debt wisely?
• You’re able to make more than the minimum monthly payment on credit cards or you pay balances in full every month.
• You are easily able to make ends meet and pay all of your monthly bills on time.
• You maintain an emergency savings fund that is enough to cover at least 2-6 months of expenses.
Worried that you have too much debt? Make a plan for repayment.
There are many options available. One method is to pay off the card with the lowest balance first, then take the money you were paying monthly toward that card and use it to pay off the card with the next lowest balance.
Another method is to use all of your extra resources to pay off the card with the
highest interest rate. Pay it off as soon as possible and use the money that would
have gone toward that payment to start paying more on the credit card with the next
highest balance. Learn more about these and other repayment options at https://powerpay.org. Use the tools and calculators on Power Pay to determine your best repayment plan.
You can make credit work for you. Monitor your credit report by checking your free annual report every 4 months at www.annualcreditreport.com. Check your credit score as needed such as when you are shopping for a loan. Understand the components that impact your credit score and use them to build your score. Determine your personal goals. Use money and other resources to meet your goals. Keep a close eye on debt and have a good management plan.