Have you recently been denied a loan, insurance coverage, or even a cell phone contract? If the answer is yes, then your credit score may need a little CPR. Maintaining a healthy credit score is important for more reasons than you might think.
You know, of course, that lenders use your credit score to approve you for loans or credit cards. They even use it to determine your interest rates. Some employers will check your score to determine whether you’re financially stable. Having good credit also is extremely important when shopping for home insurance or car insurance. Providers will check your credit to determine your insurance score – a measure of measuring how likely you are to file a claim. The score plays a role in setting your insurance premiums and could even result in a denial of coverage. Let’s take a look at what elements are used to make up your credit score:
How are Credit Scores determined?
There are several different types of credit scores, but most lenders use the FICO score, which ranges from 300-850, according to the Better Business Bureau. A healthy credit score is above 700. If your score is below 700, then it could indicate a high risk to lenders. Here is what FICO takes into account when creating your score:
- Do you have a good payment history?
- How much available credit are you using, and how much total debt do you have?
- How long is your credit history?
- Have you applied for credit recently?
- What types of credit are you using?
Luckily, there are some ways that you can improve your credit and regain your financial freedom:
How to improve your Credit Score?
1. Stay in the know
Check your credit score annually. Make sure there aren’t any mistakes on your report, and if there are, contact the reporting agency and fix them. Mistakes could potentially hurt your credit, so it’s important to stay up to date. Some websites offer free copies of your report.
2. Pay your bills early
Being timely when payments are due is a sure-fire way to boost your credit score. However, simply paying bills on their due date won’t help boost your credit. Paying early can really give you some credit brownie points. Sometimes you can even have the option of setting up automatic bill pay. This means that each month your bill is automatically drafted out of your bank account. This option is a great way to not miss a payment.
3. Keep your card balances low
About one-third of your credit score is based on the amounts you owe. If you keep your credit cards maxed out, then it pulls down your score. As a general rule, keep your purchases to less than 25% of your credit limit at any time. If you have multiple credit cards, it’s a good idea to pay down your highest balance first.
4. Limit the number of credit cards you open
This doesn’t just mean your typical Visa or MasterCard. It also includes retail credit cards. Some stores offer great incentives for you to open a credit card. But opening too many cards at once can hurt your score. The idea is to build your credit slowly and demonstrate a steady, strong foundation to lenders. Opening a slew of credit cards within a short period of time can look like an unstable house of cards.
5. Protect your credit
Once you work your way up to a better credit score, protect it. Continue to follow healthy credit practices, and don’t let yourself slip into old habits.