Huge consumer debt loads and people with bad credit make up a major difference between this current economic crisis and similar downturns in the past. In a lot of ways, the tough financial times are a major wake-up call to most individuals – and it’s telling them to get their financial lives in order.
If you’re one of the people who need to get wise about money, your first order of business should be to boost your credit score. Doing so will make it possible for you to get better interest rates on credit cards, loans, and most importantly, on your mortgage.
Read on to discover how to do damage control when it comes to your credit score. This is especially important if you’ve recently gone through a foreclosure (if so, your credit score probably took a pretty serious dive).
How to improve your credit score
If you want to boost your credit score, you’ve got to start by understanding it. When it comes to calculating your credit score, look to a company called Fair Isaac. Fair Isaac takes information obtained from each of the three major credit bureaus and calculates your score based on that information (if you haven’t heard of them already, the three major bureaus are Equifax, Experian, and Trans Union).
Once calculated, Fair Isaac sends your credit score information back to each credit bureau. This is why you access your credit score through the credit bureaus and not through Fair Isaac itself. Also, be aware that your credit score may vary somewhat between bureaus since each credit bureau has slightly different information about your accounts.
The credit score scale ranges from 300 to 850, though most scores fall between 550 and 800. Make it a goal to keep your score over 650 at least (if you fall below that level you’ll have a hard time getting credit anywhere).
Ultimately you want to aim for scores in the 700s. These numbers tend to merit the best interest rates.
When calculating your credit score, Fair Isaac considers a number of things:
- Number of new credit accounts opened within a set time period (calculated at 10%)
- Number of years credit history has been documented (calculated at 15%)
- Debt load, or amount of money owed (calculated at 30%)
- History of on-time payments (calculated at 35%)
- Types of credit being used (calculated at 10%)
Given the factors that go into calculating your credit score, it’s clear that the two best ways you can improve your credit score are by keeping your debts to a minimum (a good idea at all times) and always paying your bills on time.
Try not to apply for new credit accounts unless they are absolutely necessary for a purchase you’re sure you need. This means foregoing the popular offer at cash registers to open a store charge account for an extra 20% off. Don’t do it. Consider that the few dollars you’ll save by paying 20% less will not be worth the detrimental effect new credit has on your account.
Lastly, if you’re trying to improve your credit score you should keep old accounts open. Closing accounts actually has a negative effect on your credit score. There is an exception to this rule though, which is to close any and all unused accounts if you ever feel yourself at risk for identity theft.
Quit seeing yourself as the victim
On top of taking the initiative to improve your credit score, you’ve also got to own up to your personal financial responsibilities and understand how the credit industry plays a role. Most people will agree that the credit industry has been overly aggressive for the last few decades.
Going as far back as 30 years, banks have been allowed to set up shop in states that permit sky-high interest rates. Some states don’t even have limits on fees. In turn, banks have notoriously charged their customers whatever they please.
All this is changing thanks to new consumer protection laws recently set up by the Obama administration. That’s one move in favor of the consumer, but another (and much more important) move is for consumers to take more responsibility.
Be proactive in handling your finances
Despite the impending credit protections, your credit decisions are ultimately in your hands. Weigh your credit decisions carefully before you sign onto any type of loan or credit card. If you don’t understand the terms, contact a representative from the company offering the credit and have them spell it out for you. If you find yourself still having trouble, look for financial literacy classes in your area. Many banks and consumer agencies offer them for free. There’s no shame in seeking out financial education – in fact, it’s one of the more admirable (and obvious) things to do these days.
Taking the time to understand how your credit score is calculated and making positive changes in your financial life will boost your credit score. Know that these actions will be well worth your while – after all, your financial future has everything to do with life satisfaction.
