When you apply for a mortgage or an auto loan, the amount of money in your account isn’t the only number lenders look at to make their decision. They instantly judge your credit worthiness based on your three-digit credit score, and a low one could label you as a risky borrower and stand between you and a low interest rate on that loan. So what exactly determines that number? Your FICO score—the most commonly used one—is based on info in your credit report like your payment history, amounts owed, length of credit history, new credit and the types of credit used. A FICO score over 720 is considered great, while a score below 550 makes it difficult to get a loan or a mortgage.
Luckily, your FICO score isn’t set in stone and there are things you can do to change it over time. Here’s how you can improve yours:
- Get copies of your credit report from all three major credit bureaus (TransUnion, Experian and Equifax), check for discrepancies and correct them. Even though your credit score isn’t included, you’re entitled to a free report from each every 12 months. Just visit annualcreditreport.com.
- Pay bills on time. Better yet, pay them in advance. According to myfico.com, payment history accounts for 35 percent of your score so set up alerts or automatic payments so you don’t forget.
- That said, manage your savings and checking accounts to make sure checks never bounce. You’ll avoid racking up fees and make sure your bills are paid on time.
- Avoid maxing out your credit cards and keep balances at 30 percent the credit limit. This shows that you’re a responsible spender. Spread out your purchases over different cards and pay your bill in full each month.
- Try not to open too many new accounts, especially if you already have several unused ones. (Even if the store you’re shopping in offers 10% off if you open an account with them, think twice before doing so. Essentially you’re getting another credit card.) And opening a new account to pay off another is a big no-no. Instead work to pay off your debts rather than moving them around.
- Keep older accounts open even after they’re paid off. Closing them as a quick credit score fix could potentially hurt you, since lenders will think you have a shorter credit history than you actually do.
Note that although these are simple tips you can start doing right now, improving your credit score is by no means a quick fix. Focus on managing your accounts, being smart about your credit and staying current on bill payments. If you need additional help, stop by your local bank and ask if they have credit counselors who can advise you. Over time, you’ll see that number slowly work its way up.