Credit Scores 101: Why They Matter and How to Improve Yours
Your credit score is a critical factor in determining your financial stability and long-term wealth. But what exactly determines your credit score, and how can you improve it? In this article, we’ll explore why credit scores matter and how you can improve yours.
Why Does Your Credit Score Matter?
A strong credit score opens up more opportunities — you can get a loan to help you buy a new car or purchase a home — and it helps you pay less by reducing the interest rate you pay when you do borrow money. When it comes to big purchases, a lower rate can save you hundreds or even thousands of dollars over time
On the other hand, a poor credit score can lead to higher interest rates, increased insurance premiums, and limited access to credit, making it more expensive to achieve financial goals. Here are some of the biggest benefits of having a high credit score:
- Lower Interest Rates: With a higher credit score, you’re likely to qualify for lower interest rates on mortgages, auto loans, and personal loans. Lower interest rates save you money over time, making large purchases more affordable.
- Better Loan Approval Odds: A strong credit score boosts your chances of approval when applying for new credit, such as a car loan or mortgage, which makes major milestones more achievable.
- More Favorable Credit Card Offers: Many of the best credit cards, with valuable rewards programs that offer cash back on purchases and perks like travel insurance, require good to excellent credit.
- Reduced Insurance Premiums: Some insurance companies consider credit scores when determining premiums for car and home insurance. A good score means you could save money every month.
7 Ways to Improve Your Credit Score
Improving your credit score isn’t a quick fix, but with consistency and smart financial practices, you can build a solid score over time. Here are seven strategies to help you improve your credit score:
1. Pay Your Bills on Time
Payment history is one of the most important factors in your credit score. If lenders know you routinely make payments on time, they’ll be more willing to lend you money and give you a better deal.
If you have a hard time remembering to pay your bills before they’re due, consider setting up automatic payments or calendar reminders to stay on track.
2. Reduce Your Credit Card Balance
Aim to keep your credit utilization ratio — or the amount of credit you’re currently using compared to your total credit limit—below 30%. That means that if your total credit limit is $10,000, your balance should ideally be under $3,000 to avoid a negative impact to your credit score.
Whenever possible remember to pay off your full credit card balance each month. Not only is it great for your credit, but it also helps prevent you from accruing additional charges like interest or late fees.
3. Only Apply For Credit When You Need It
Each time you apply for new credit, like a credit card or a personal loan, a hard inquiry is recorded on your report. Although a single application isn’t hugely impactful, it can temporarily lower your score — and multiple applications add up. Applying for credit sparingly can help you maintain your score or avoid a negative impact.
Only apply for credit you truly need to, and try to limit applications within a short time frame if you’re applying to multiple lenders for a loan. Typically, applications for credit made within a 14-day period are all treated as one, so you can safely reach out to a few prospective lenders without fear of damaging your score.
4. Increase Your Credit Limit (But Be Cautious)
Asking your card servicer for a higher credit limit can reduce your credit utilization ratio, even if your spending habits don’t change. Dropping below the 30% threshold is a step in the right direction for improving your credit score — however, it’s important that the higher limit doesn’t tempt you to spend above your means.
Remember that you should treat your credit card spending the same as you would treat cash in your wallet. While credit cards have the advantage of being flexible in an emergency, it’s easy to rack up debt if you aren’t careful.
5. Diversify Your Credit
While it may seem fiscally responsible to have only a single credit card that you routinely pay down, lenders like to see a mix of credit types. Multiple credit cards, auto loans, and mortgages all factor into the mix. Some apartment complexes and utility providers also report on-time payments to credit bureaus. Having a diverse credit profile demonstrates your ability to manage different types of credit responsibly.
Of course, you also shouldn’t take on debt simply to prove a point! Don’t open new accounts solely for the sake of credit diversity, as it’s only a small piece of your overall score.
6. Keep Your Old Accounts Open
The length of your credit history plays a role in your score. Keeping older accounts open, even if you no longer use them regularly, helps increase the average age of your accounts.
Closing old accounts can reduce your available credit — which increases your credit utilization ratio — and shorten your credit history. Depending on the type of account, it may also reduce the diversity of your credit mix. All of that comes together to potentially lower your credit score.
7. Regularly Check Your Credit Report
It’s important to know what’s helping and hurting your credit score. By understanding what’s dragging your score down, you can come up with a plan to improve your credit over time — and by keeping an eye on your report, you’ll know if any fraudulent accounts or collections appear. If you do have a collection on your account, remember that you can always dispute it.
By law, you can get a free copy of your credit report every 12 months from each of the three major credit bureaus through AnnualCreditReport.com. Put some time on your calendar each year (or more often!) to review your credit reports and come up with a plan.
Need Help Building or Rebuilding Your Credit?
Good credit can save you thousands of dollars over time. If you’re working to establish or rebuild your credit, a secured credit card can be an excellent tool to achieve your financial goals. That’s why we offer the First Bank Platinum Secured Credit Card, which is designed specifically for those with a lower credit score or no credit history.
Accepted worldwide, equipped with fraud protection, and easy to manage through our online portal, this card gives you the flexibility and security you need to develop a strong credit profile. By consistently making on-time payments and keeping balances low, you can use this card to strengthen your credit and create new opportunities for yourself in the future.
