When it comes to managing personal finances, your credit score is arguably the most crucial number to be aware of. A strong credit score can unlock access to loans and credit cards with more favorable terms and interest rates than those available with a lower score.
While unexpected events can sometimes derail our financial plans, building a strong credit score is achievable with financial discipline. By avoiding decisions that lead to overextension, you can establish favorable credit history simply by making responsible financial choices and paying debts on time.
For many banks, a credit score of 750 or higher is considered excellent, though a rating above 700 is still considered good. Typically, if your score falls below 700, you risk less favorable credit terms and/or denial of credit requests. In general, five key factors determine your credit score. Some have a larger impact than others, but each area is examined to determine a person’s ability to repay a loan.
- Payment history: Consistently paying your bills on time is the quickest way to improve your credit score.
- Credit utilization: Maxing out your credit cards or consistently carrying large balances will negatively impact your credit score.
- Length of credit history: The longer you’ve maintained open credit accounts, the better it reflects on your credit score.
- Number of accounts or inquiries: Too many credit inquiries can lower your credit score.
- Credit mix: Managing a variety of credit accounts—like mortgages, auto loans, student loans, and credit cards—demonstrates your ability to handle different types of debt, which can boost your score.
Tips for Improving Your Credit Score
Building and maintaining an excellent credit score requires organization and discipline to live within your means. Here are some steps to help you improve your score:
- Pay bills on time — Payment history makes up about 35% of your credit score. To ensure on time payments, consider setting up automatic payments or calendar reminders.
- Keep credit card balances low — Even if you have a high credit limit, try to keep your credit utilization below 30%. This signals to lenders that you're a responsible borrower. To manage this, consider setting balance alerts or making additional payments throughout the month.
- Check your credit report each year — Visit www.annualcreditreport.com at least once a year to request your credit report and dispute any errors that may be pulling your score down. Since there are three nationwide credit reporting agencies (i.e., Experian, Trans Union, and Equifax), consider spreading out your credit report requests throughout the year.
- Don’t expect changes overnight — Building or improving credit is a long-term process. Credit reporting agencies need to see consistent, responsible financial behavior over time before significant changes to your score are experienced. It may take time, but it will pay off.
