Outside of your Social Security number, your credit score may be the most important number you have.
Credit card issuers and mortgage lenders aren’t the only ones who access it. Banks, utility providers, even potential landlords, can access your score to determine how financially responsible you are. How good your score is can determine how much you’ll pay for security deposits as well as interest payments.
“Some employers are even factoring your credit score into their hiring decisions because it shows your credibility and trustworthiness,” said Jackie Lin-Ham, a certified financial planner at Brewster Financial Planning in Brooklyn, New York.
So even if you’re not planning to make a big purchase like a new home or car anytime soon, it’s worth making the effort to build good credit.
OK, you get it. So how can you improve your score?
Step one: Find out what your credit score is. Scores range from about 300 to 850. (Some scoring models start below 300.) Where do you want to be? Generally, as long as your score is above 750, you’re considered to have excellent credit, meaning you’ll have access to the lowest interest rates and also have the best chance of being approved for loans and other applications that include a credit check.
More than 50 million consumers now have “free and regular access” to their credit scores, according to a new report from the Consumer Financial Protection Bureau. That’s because many credit card issuers, including Citibank (C), Discover (DFS) and Capitol One (COF), now offer free scores on select cardholders’ monthly statements or through online access. Credit.com, CreditKarma.com and CreditSesame.com also allow free looks at your score and the reports that influence it.
Step two. Check your credit report for errors or unauthorized transactions. Thirty-five percent of consumers have never examined their credit reports, according to a survey released Monday by Bankrate.com. That may be a costly mistake, say experts. A 2013 FTCstudy found 1 in 4 consumers spotted errors on their credit reports that could affect their scores.
You can order a free copy of your credit report from each of the three main credit bureaus (Equifax, Experian and TransUnion) once every 12 months from annualcreditreport.com. If you find an error be sure to contact the credit bureau right away so they can address it, because errors can affect your credit score.
Step three: If you’re carrying credit card debt, figure out a plan to pay it off as quickly as possible. For one, the faster you pay it off, the less interest you’ll pay on that debt. But carrying debt—even if you’re diligently paying the minimum or a little more each month—can actually hurt your credit score too.
“Most people don’t understand the amount of debt on your card affects your score,” explained John Ulzheimer, president of consumer education at CreditSesame.com. “Paying the minimum is good, but it’s hardly going to lead to better credit.”
It’s all about the debt-to-limit ratio. If you can’t pay it all off within a month, which is ideal, be sure that what you owe is less than 30 percent of your total credit limit. How much you owe compared to the total credit you have, also known as your debt utilization ratio, counts for a whopping 30 percent of your percentage score.
Here’s how the rest of your credit score breaks down: 35 percent is your payment history, 15 percent is your credit history, 10 percent is the mix of credit you use—creditors want to see that you can responsibly handle payments from utility bills to credit cards and student loans—and 10 percent is new credit. (Opening several credit accounts in a short period of time is seen as indicative of greater risk.)
Step four: Keep your cards active and don’t close credit cards you’ve paid off. Make sure to use your cards at least a few times a year (and pay off the balance within 30 days to avoid paying interest), so that the accounts remain active. Card issuers may close accounts if cards remain inactive for too long, thereby removing it from your credit history.
If you paid off a credit card and don’t use it, you might be tempted to cancel it. But don’t. “It isn’t good to close cards for your credit score. A very good strategy is to use it like credit score insurance, so if someday you want to use it you can,” said Ulzheimer. In the process, it helps your credit history.
When shopping for new credit, Lin cautions against applying for too many cards at one time, which can ding your credit, and recommends keeping a close eye on the interest rate for the card you choose.
If you’re in your 20s, it can take a little time to build up history, but it isn’t just about getting a card and using it. Paying on time is an important factor —whether it’s a credit card, a cable bill or a student loan payment.
“Building good credit is so important because of its vast influence,” said Ulzheimer. “It’s not terribly hard [to do] and usually happens organically over time as you apply for and open accounts like credit cards, auto loans and mortgages.”
But putting a little more effort into boosting your credit score now can save you big money later.