PAY DOWN REVOLVING ACCOUNTS
One of the most important credit scoring factors is your utilization rate. This is the portion of available revolving credit (e.g., the credit limits on your credit cards) that you’re currently using.
For example, if you have two credit cards and each has a $5,000 limit, you have $10,000 available to you. When your combined balances are $5,000, your utilization rate is at 50 percent.
A lower utilization rate is best for your scores — some say to try and keep your utilization below 30 percent or 10 percent as a rule of thumb.
While paying down credit card debt can be difficult, this is fortunately also one of the few credit scoring factors that you can quickly impact. Even consolidating your credit card debt with an installment loan (such as a personal loan) will lower your utilization rate, as you’re moving the debt from revolving accounts to an installment account.
If you’re struggling to afford your credit card bills, also consider a debt management plan (DMP) from a nonprofit credit counseling agency. A DMP alone won’t necessarily increase your scores, but it could help you pay down your debt with a single, reasonable monthly payment and keep you from missing a payment (which could lead to fees and hurt your scores).
CONTINUE BUILDING YOUR CREDIT HISTORY
There are a few important points to keep in mind when considering the age of accounts, your credit history, and credit scores:
- Credit accounts can live on your credit report for up to 10 years after you close the account or pay off the loan, assuming you never missed a payment.
- Many negative marks, such as a missed payment, will fall off your credit report after seven years. Their impact can also decrease over time.
- If missed payments led to an account being charged-off, going into default, or being sold to collections, the entire account will fall off your credit report seven years after the initial late payment.
- The average age of your accounts on your credit report can impact your scores. A higher average age is best, and opening a new account will decrease the average age. However, don’t let this keep you from opening accounts you need.
You might have been using credit for years and have a lengthy credit history and a high average age of accounts. But if you’ve paid off your loans and prefer not to use credit cards, you might actually want to open a new card. You don’t need to use the card every day, but having one active account could be important.
For FICO credit scores, you need at least one account with activity during the previous six months, and one account that’s at least six months old (they can be the same account), to qualify for a credit score.
A free way to go about this is to get a card that doesn’t charge an annual fee. Use it for a small monthly bill, and set up automatic payments for the full balance so you won’t pay any interest.
LEARN ABOUT THE OTHER CREDIT SCORING FACTORS
While your credit utilization and payment history are often the most important scoring factors, many things can impact your scores. For example,
- Applying for new accounts can lead to a hard inquiry, which may hurt your scores.
- Checking your own credit scores and reports can lead to soft inquiries, which don’t impact scores at all.
- Having a mix of different types of accounts in your credit history could help your scores.
You can read more about the details of different scoring factors on the myFICO and VantageScore websites.
REVIEW YOUR CREDIT REPORTS FOR ERRORS
If you’re focused on lowering your utilization rate and making on-time payments, one of the next things you can do is to review your credit reports for errors. An error, such as a late payment on an account when you’re sure your payment wasn’t late, could be hurting your scores.
You can file a dispute with the credit bureau (or credit bureaus if the error appears on more than one report), and ask the bureau to correct or delete the late payment mark.
THE BIGGER PICTURE — CREDIT SCORES DON’T EQUAL CREDITWORTHINESS
While many creditors consider your credit scores when reviewing a loan or card application, the score is often only one of many metrics that get considered. Your overall outstanding debts, income, and your monthly bills and income can also be important.
While Social Security and retirement savings could count toward your income and help you qualify, you might not have as high an income as you did during your working years. As a result, it may be more difficult to qualify for large loans or the lowest possible rates.