For us Californians, the answer to the question, “Why should I buy a home here?”…
It’s a safe bet that you’ve heard the phrase “credit score,” a few times, but do you really know exactly what that means? Don’t worry if not. Most people really don’t know much about their credit score other than that it’s important. So, let’s go through a quick rundown of just what it is and how you can improve it.
What is a Credit Score?
Whether you want to lease a car, own a home, or get insurance, your credit score is a huge factor in building the kind of life you want. It’s a calculation of how financially sound you are as an individual, expressed as a three-digit number between 300 and 850. There are plenty of places you can read up on it, but that’s the short and sweet version.
So, when institutions like banks try to evaluate how worthwhile it is for them to invest in you (with a mortgage, for example), your credit score is a major factor that they base that on. It’s important to know that your score can fluctuate depending on the day and exactly which credit bureau and scoring model are used.
How Can I Raise My Credit Score?
Now, knowing the meaning of your credit score is all well and good, but you’re probably wondering the important thing here: how can I raise mine? Chances are that at some point, you’ll want to know so you can secure a loan (like a mortgage). Luckily, that’s a question with a lot of possible answers, all doable. Yes, there are the obvious ones like “pay all your bills on time and in full,” but there are some other handy techniques for pushing your credit score up into a higher range.
Get a Free Credit Report
The first step to improving your credit score is learning what’s actually on your report. You’ve got to know where you’re starting from before you know how to improve it, right? With a free credit report from annualcreditreport.com, you can find out exactly where you stand when starting your efforts to boost your score. One important note is that the free report won’t tell you exactly what your score is, but it will show you if there are any issues on your report that could be bringing your score down.
You can pull one credit report from each of the three major credit bureaus once per year (Experian, Equifax, and TransUnion). Some people like to pull one of these every four months so they can keep a closer eye on their credit report.
Verify Your Credit Report Info
Now that you’ve got your report in hand, the next (and often overlooked) step is to make sure the information on it is accurate. It’s easy for information to get misreported. And mistakes, even small ones, can add up to big problems for your credit score. Look over everything with a fine-toothed comb and make absolutely certain all your info is 100% correct.
If you find inaccuracies, it’s important to report the incorrect information to the credit bureau. That should fix the problem with any other bureaus who are reporting the same information.
Build and Maintain an Emergency Fund
This one’s a good idea in general in addition to being a great way to maintain or even boost your credit score. Having a readily accessible reserve of money squirreled away means that sudden hardships won’t result in you getting behind on bills. This is important because missed, late, or underpaid bills will drag your credit score down hard and fast.
Having an emergency fund to cover unexpected costs or to get you through tough times will keep your credit from taking a hit when you’re in a financial tight spot. Plus, if you’re thinking of buying a house, it’s a good idea to get into the habit of having an emergency fund.
Don’t Open Up Too Much New Credit
Yes, opening new lines of credit is how you start building up your credit in the first place. The more you can prove you pay things off on time and in full, the better you can demonstrate your financial stability. But you don’t want to overdo it, particularly if your credit is already lower than you’d like. Make sure whatever new sources of credit you open are ones you know you can pay off in a timely way.
Keep Your Existing Credit Open
If you’re already selective about what new credit you open, you may wonder if you should start closing credit lines that feel unnecessary. You might consider closing a credit card you haven’t used in a while, but it’s actually better to keep it, as long as you’re not tempted to use it unwisely.
Why is this? Well, it’s all about your credit utilization rate. Part of having a good credit score means not utilizing too much of it. If you have $10,000 in available credit but usually use around $3,000, you’re utilizing just 30% of your available credit—that’s good. If you utilize 90% of your credit, that isn’t nearly as good. Closing down old credit cards can increase your credit utilization rate and lower your score.
Understand Your Credit Mix
Your credit mix is determined by the variety of accounts that determine your credit. Credit cards, student loans, and home mortgages are all different types of credit that can make up your mix. And the key is to have a healthy mix of several kinds of loans to show that you can manage both revolving and fixed debt responsibly.
Know Your Credit Limit
It can take time to build up, or even rebuild, your credit score. But don’t get discouraged because it’s an extremely doable endeavor. Be patient, be diligent, and take all of the above steps you possibly can. Before you know it, your score will start to rise and open you to a world of outstanding investment and ownership possibilities previously beyond your reach. So, get cracking on that credit score and brighten your financial future now!
If you’re just not sure where to start, check out our tools page where we introduce you to our Credit Guy. With a free credit review and no upfront fees, you have nothing to lose and everything to gain.