Your New Money Goal: Increase Your Credit Score

We all have goals for our life. If you want to reach your goals, you need to:

• Recognize how reaching this goal will positively impact your life, which will give you motivation for putting in the work to reach your goal

• Identify the steps  you need to take to reach the goal

For example, if you want to lose weight, you need to determine how losing weight will positively impact your life (better health, better appearance, etc.) and identify the steps you need to take to get to your desired weight (exercise, diet, etc.)

One goal all of us should have is to increase our credit score. This number plays an important role in your life. Following are some of the benefits of having a high score:

•  You pay less for your car insurance
• You will be able to get your dream apartment
• You will pay less (sometimes substantially less) for loans (including your mortgage, auto loans, personal loans and others)
• You won’t be prevented from getting your dream job

If you have borrowed money of any kind in your name (personal loans, student loans, car loans, credit cards, etc.), you have a credit report. This report includes information about how you have repaid money you’ve borrowed. For each account it is shown if you paid on-time or if you paid late each month (30, 60 or 90+ days late). It also shows how much of each credit line you are using (ex: you have a credit card with a $500 limit and you are carrying a balance of $100).

If you have had serious money management problems, those will be clearly displayed – bankruptcy, accounts that have gone to collections, etc. Your credit report also shows how many times you have given financial institutions permission to access your credit report (also called inquiries).

Your credit score is based off information in your credit report. Your score ranges from 300-850 (the higher, the better). The following graph shows how your credit score is determined:

If you want to reach your goal of increasing your credit score, following are some steps to take:

Payment History (35%):

It’s easy – pay all your bills on time! Even if you’ve had problems with late payments in the past, if you start paying on time now, your score will gradually increase. If you need to be late, don’t hit the 30 day late mark!

Amounts Owed (30%):

This category is called your capacity – or how much of your credit limit you are using on your revolving credit lines (typically credit cards). Don’t use more than 30% of the credit that is available to you. For example, if you have 3 credit cards with a total credit limit of $1,000, don’t carry a monthly balance over $300. The lower your percentage of credit use, the better. If you do need to use more than 30%, talk to your credit card company to see if they will increase your credit limit.

Length of Credit History (15%):

This category takes into account both your oldest reporting credit line and the average age of all your accounts. Only time can improve this section. However, closing old credit cards can harm your score in this section. Unless you are paying an annual fee on a card you aren’t using, keep those old accounts open.

New Credit (10%):

The biggest part of this category is inquiries. In general, don’t apply for more credit than you need. If you have lots of credit applications, your score will drop. If you are rate-shopping for a mortgage or car loan, which is a good idea!, rate shop in a 45-day window. As long as you are applying for the same type of loan at each financial institution, all your inquires will only count as 1 inquiry.

Types of Credit Used (10%):

Lenders like to see that you can handle a variety of loans – credit cards, student loans, car payments, a mortgage, etc.

Also, remember to check your credit report regularly to make sure there are no errors that may be bringing down your score. Get 3 free credit reports each year, 1 from each of the 3 major credit reporting bureaus, at: www.annualcreditreport.com.

Know you will only get your credit report. The items in this report determine your credit score, which you have to pay a small fee to access.