You may have seen commercials promising low interest rates for homes and cars, especially for consumers with good credit scores. But what if you don't plan on applying for credit soon? Do credit scores still matter?
Whether you use it now or in the future, a credit score can be an excellent tool to help you track and manage your finances. Here's what you should know about this important rating and how you could improve it over time.
What is a credit score?
A credit score is a number that rates you on how likely you would be to pay back money to a lender. A higher score indicates you are more likely to repay. Credit scores are calculated using information from your personal credit report and other information, such as how much money you owe and how long you've had debt. While there is more than one score out there today, the FICO score is the most common.
Why do credit scores matter?
Credit scores are important measurements, even if you don't plan on applying for loans anytime soon. A score may be used in qualifying you for an apartment lease, a credit card or for some types of insurance. By having a good score now — before you need it — you'll be in better shape down the road when you do need to borrow for a home, car, or business.
A healthy credit score won't just get you a "yes" on that credit application. It could also qualify you for lower interest rates and better payment terms. Borrowing the same amount of money with an excellent score will likely be cheaper over time than borrowing with a poor score.
What is my credit score?
The good news is that it's easy to check your credit score, although some methods require you to pay. When you request your annual free credit report, you may be offered a credit score for an extra fee. If you don't want to pay this way, you can also access your credit score as part of some credit monitoring services or even on the billing statements for certain loans and credit cards. Banks and some budgeting apps may also provide this service for their members. Just be sure what any future or recurring charges are before you request to see your score for free.
How can I improve my credit score?
Your credit score is made up of many factors, including how you use credit. FICO, in particular, rewards the following behaviors over time:
Consistent, on-time payments
Using less than 30% of your available credit
Letting your accounts age so that you don't have only new credit
Keeping a mix of credit types, such as revolving credit (credit cards) and installment credit (car payments, school loans, mortgages)
If you can't tackle everything on this list, just be assured that making regular, on-time payments is probably the most important thing to do. Not only can this help keep your score healthy, but it is also a solid financial move that can help reduce the chance of getting into debt problems. Pay off your balances on credit cards in full each month, if you can, since credit score providers reward paid-off tradelines and you'll probably pay no interest.
Common credit score mistakes
Knowing what not to do is just as important as knowing what to do, especially when learning how to improve your credit score. Things to avoid include:
Closing unused lines of credit or credit cards. This can lower your available credit amount, putting your debt-to-available ratio (utilization ratio) out of sync and causing your score to drop.
Applying for too many new cards or loans. If you want to keep your score healthy, be cautious about opening new cards or debts. Just apply for what you need, and don't apply to several at once in the hopes of getting the best offer. Most cards can tell you if you're approved with a pre-approval process that won't require you to go through the entire application process.
Sharing credit cards and financial information with others. Lending your cards to family members and friends can make you responsible for anything they buy. In the wrong hands, it can create additional debt you won't be able to manage and sink your credit score quickly.
Keeping your credit score healthy
Although you may want to know how to raise your credit score fast, it's important to note that all of the tips above take time. There's no surefire way to boost your score overnight, so avoid any services that promise to do this for you. With careful attention to your finances, including keeping an eye on your annual credit report, you can catch behaviors that may be holding you back from having your best credit score ever.
