If you’re working hard to build your credit, you’ve set your sights on a worthy goal. A stellar score will make it easier to qualify for a mortgage, get the best rates on insurance policies and set up utilities. In short, having a high credit score makes many aspects of both your personal and financial lives much easier.
But the road to better credit could be paved with incidental costs if you’re not careful. Listed below are tactics to watch out for, because they often turn expensive – check out our tips for avoiding these costs to boost your score without spending a dime.
Opening a new credit card to improve your credit utilization
A whopping 30% of your credit score is heavily influenced by your credit utilization ratio. This is the amount of credit you’re using on your credit cards compared with the total amount of credit available to you. For instance, if you have a card with a $5,000 credit limit and your balance is $2,000, your credit utilization ratio would be 40%.
Experts recommend keeping your credit utilization ratio below 30% at all times; in an effort to follow this guideline, many people open additional credit cards that they don’t plan on using. They reason that this will increase their amount of available credit and drive their credit utilization ratio down.
This strategy is potentially problematic for a few reasons, not the least of which is that it could result in an unnecessary expense. If the card you apply for carries an annual fee, you’ll end up paying a charge just to keep the card open.
If you decide to go this route, be sure that the card you apply for doesn’t charge this fee. But a better (and cheaper) way to improve your credit utilization ratio is to pay off your credit card debt. This way, you’ll dodge the costs potentially associated with opening a new credit card and save money on interest charges. Win-win!
Checking your credit score online
Tracking your credit score is an important part of improving it – after all, you’ll need to gauge your progress. But until recently, it was hard to get access to your credit score for free.
While many online services offer free credit score services, usually these are proprietary scores. Since most banks look at your FICO score when they’re deciding whether or not to extend credit, the score you’re getting from these sites might not match up to what your lender is seeing. In order to see your FICO score, you’ll have to pay a fee to the company.
But in the past year it’s gotten much easier to avoid this expense. Several credit card issuers and even some lenders now provide customers with free access to their FICO scores. In most cases the score comes printed on the monthly statement; this means it’s easy to see how your credit is improving over time.
If checking your FICO score frequently is important to you and you’re in the market for a new credit card, it might be worthwhile to consider one that offers this free benefit.
Taking on a new loan to improve your mix of accounts
Ten percent of your credit score comes from the types of accounts you have on your credit report. Generally, it’s good to have a healthy mix of installment and revolving accounts; this shows that you’re skilled at managing different types of credit.
Some people with only one type of open credit account panic and take out a loan they don’t really need in an effort to improve their score. But applying for new credit can result in fees, plus you’ll likely be charged interest every month. The costs of this move can really add up over time.
Unless you’re able to get a fee-free loan at 0% interest, it’s probably not worth it to take drastic measures to improve your mix of credit accounts. Since it makes up a very small portion of your score, you’re much better served by focusing your energy on paying your bills on time and reducing your credit card debt, both of which have a much bigger impact.
If you do need new credit, be sure to shop around for the loan with the best terms within a short (two week) window of time. That way, your multiple applications will only be viewed as one hard inquiry to your score.
The bottom line: Be careful of the incidental costs of improving your credit. To avoid them, follow the tips above – you’ll be on your way to a high score without a penny spent!
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