I have a lot of people ask me every week on how they can improve there credit score.
Here are a few tips that can help you do that.
Scour your credit reports. Your credit score is derived entirely from the information on your credit reports at the three bureaus, and a single serious error can cost you big time. You’re entitled to a free annual look at your reports from www.annualcreditreport.com. Dispute any accounts that aren’t yours or any negative entries that are more than seven years old (or 10 years in case of bankruptcy). Don’t be late. Skipping a single payment can knock your score from prime to near subprime territory overnight. Make sure all your bills are paid on time. Consider setting up automatic or recurring payments for all your credit accounts.
Watch your balances. The less of your credit lines that you use, the better. Try not to use more than 30% of your credit card limits at any time during the month; using 10% or less is even better. Remember that the credit bureaus and your credit scores don’t distinguish between balances you pay off and those you carry month to month; the balance that’s reported to the bureaus is typically the one that shows on your most recent monthly statement. If you’re in the habit of using a big portion of your credit limits — because you travel on business or are chasing credit card rewards — consider asking for higher credit limits. (You also could make two payments a month on each high-use card to lower the balance that’s reported to the bureaus. To make this work properly, you’ll need to make one payment just before the statement closing date on the account and a second after the closing date but before the due date. If you fail to make the second payment, you may be reported to the bureaus as being late.)
Don’t close accounts. Fair Isaac has made it clear that closing accounts can never help a classic FICO score and may hurt it. With FICO 08, that’s even truer. The new scoring formula wants to see evidence that you are actively and responsibly using credit. So you get more points for having open accounts in good standing; conversely, having a higher proportion of closed accounts can hurt you more.
Keep your accounts active. In the past, the biggest risk from letting accounts be inactive is that your lenders might close them, thus dinging your scores. Now simply having too many inactive accounts could count against you in some circumstances. Once again, the new scoring formula is looking for evidence you can responsibly manage credit. Consider keeping your oldest and highest-limit cards active by charging something to them each month (making sure to pay the balance off in full, of course).
Piggyback the right way. You still can benefit from someone else’s good credit under both the old and new FICO formulas by being added as a joint account holder to a credit card. In most cases, the other person’s history with the card will be added to your credit reports; as long as the account remains in good standing, it can help your scores. But being added as a joint account holder involves more risk: You’re now jointly responsible for the debt, whereas an authorized user typically would not be. Getting taken off the account isn’t easy, either. A phone call from the primary cardholder might remove the name of an authorized user, but you often can’t be removed from a joint account until it’s closed.
Consider an installment loan. There are two main types of credit: revolving accounts that allow you to build up and pay down balances, and installment loans that typically have fixed payments that require you to pay down your balance over time. Credit cards and lines of credit are examples of revolving accounts, while auto loans and mortgages are considered installment loans. The FICO formula has always rewarded folks who had and successfully managed both types, which is why getting an installment loan was often recommended as a way for people with troubled credit to rehabilitate their scores. The new scoring formula is even more sensitive to the mix of credit types people have and use. In the past, people were able to get and keep very high scores using only credit cards; it’s not clear if that will still be true under FICO 08.
That doesn’t mean you should march out and get a loan you don’t need. Loans you’ve already paid off will continue to help your scores as long as they’re still on your credit reports, and many lenders continue to report closed installment accounts for 10 years. But if you’re trying to improve a low score, an installment loan is likely to help you even more under FICO 08 than it did under the classic FICO score.
