This morning I stopped by the morning program Fox & Friends on the Fox News Channel to discuss ways we can all boost our credit scores, especially as banks slowly begin to ease their lending practices.
First, let’s review your credit score and what it means. Your credit score is your financial DNA. It reflects your credit worthiness and how risky of a borrower you potentially are based on information recorded on your credit report – including how well you’re managing your debt – from credit cards to a mortgage, a car loan, a student loan, etc. The most widely used credit score is the FICO score and is a number between 300 and 850. The higher your score, the better your chances are of qualifying for the best loans with the most favorable terms and lowest interest rates. A score of 750 or higher is considered pretty darn excellent.
[Consumer Resource: Where Can I Get My Credit Scores for Free?]
To see your credit score you can purchase it directly from FICO for roughly $20. Or, if you want to get a close approximation you can get your free Credit Report Card from Credit.com, which includes a version of your credit score.
There’s no slam dunk when it comes to boosting your credit score, but following these steps can assure that your score won’t suffer.
- Don’t miss any more payments. This is extremely important. Your payment history makes up 35% of your FICO credit score. One of the best ways to improve your score is to just make your monthly credit card payment deadlines. Set up automatic payments with your lenders and your credit card companies so you never slip! If you’ve missed payments in the past, get current and stay current. The older those late payments get, the less impact they’ll have –as long as you stay current.
- Pay down your balances. Pay down your debt aggressively – not just the minimum payment. You’ll be in debt for decades longer if you only pay the minimum payment. Your credit score grows when your debt shrinks. In fact 30% of your credit score is partly based on an ingredient called your debt to credit utilization ratio. It equates to the amount of debt you’re carrying on your credit cards versus your credit limits on those cards. So for example, if you have a credit card with a $10,000 limit and you’re carrying a balance of $5,000, you’re 50% utilized on that card. That’s too high. You want to bring down that ratio closer to 10% or less. Those with the highest credit scores in this country – with a score of 760 or greater – have debt to credit utilization ratios of just 7%.
- Check errors on credit reports. Your credit score is based on information collected by the credit reporting agencies, which is documented on your credit reports. If the information is wrong, your credit score can suffer. And get this — one in four credit reports contain serious errors — from false delinquencies to credit accounts that don’t belong to the person. That’s enough to cause a bank to deny you a loan. So what you want to do is go to AnnualCreditReport.com and pull your credit reports from each of the three major credit reporting agencies. It’s free to do so once a year. Make sure that every account listed is correct and all the history of payment is accurate and up to date. If you see any false information you need to contact the credit reporting agency, and the lender or creditor that supplied that information to the credit reporting agency, to have it corrected.
- Open a secured card. For those of us who want to rebuild our credit scores but can’t qualify for a traditional credit card due to poor credit histories, a secured card can help. I call it a credit card with training wheels. It provides you with a line of credit equal to a sum that you deposit with the bank, starting at around $200-$300. So, if you deposit $300, you can only charge up to $300 on the secured card. Like a regular credit card, you’re responsible for paying back whatever you use. After paying off the card on time consistently for about a year, you may be able to then qualify for a traditional credit card with a much bigger limit that requires no collateral.
If you missed the show this morning, you can catch the replay here:
[Related Resource: How Do Secured Credit Cards Work?]