Credit Sesame examines why you might want to boost your credit score.
If you don’t want to boost your credit score, maybe you already have a perfect score of 850. Otherwise, you really should want a higher score. Why? Because the higher your score is, the more money you stand to save when you borrow. And the sums involved are staggering.
Save, Save, Save!
Check out these examples listed on on our homepage. Someone with great credit can expect to save tens of thousands of dollars compared to someone with poor credit.
- More than $7,500 on a $30,000, 72-month auto loan
- Over $85,680 on a $432,000, 30-year, fixed-rate mortgage
- More than $2,475 on a $10,000, 36-month personal loan
A 2022 report by Syracuse University. “The Cost of a Bad Credit Score,” explains why your credit score is so important.
It makes the point that it’s not just when you borrow that a bad score penalizes you. Your landlord might charge you an extra $1,006 as a security deposit. And your insurer could charge you $1,965 a year more across your homeowners and auto insurance.
Worse, although a potential employer cannot access job candidates’ credit scores, it can still view their credit reports. And that’s almost the same thing. Because a credit score is simply a three-digit representation of the contents of one of those reports. So having poor credit could see you being turned down for your dream job.
How to Boost Your Credit Score
Actively driving up your credit score can save you a bundle. And all that extra money you retain should buy you a better lifestyle as soon as your score’s as high as you can get it.
But how do you go about raising your score? It’s not as mysterious as you might think. In fact, you just have to follow a few simple rules.
Pay all your bills on time
This is the single biggest factor in your credit score and accounts for 35% of it. Pay every bill promptly — perhaps even a day or two early, so you’re not at the mercy of the banking system’s creaking technology.
Late and skipped payments cause real damage. Defaults (when a lender declares you have not paid and you are in “default”) and collections (when debt collectors start calling) are even worse. In fact, they’re awful for your score.
Prioritize making timely payments, even if you have to make sacrifices in your lifestyle to keep up with them. Let them slip only in the face of a personal financial catastrophe, such as sickness or unemployment. Even then, call your lenders before each due date, explain what’s happening, and ask them for time to pay without it hurting your credit score. You can’t demand this. But you may be surprised by how many will do their best to help you out.
Keep your card balances low
Keeping your store and credit card balances low is very nearly as important to your credit score as making timely payments. It makes up 30% of your score. So, take this seriously. Perhaps surprising, it’s not so much what you owe on your plastic as much as what percentage of your credit limits you’re using.
Suppose you have a card with a $10,000 credit limit and your balance is $1,000. You’re using 10% of your credit limit, and you’ll boost your credit score. But suppose you’ve maxed out that same card, and your balance is $10,000. You’ll be using 100% of your credit limit, and that should cause your score to tumble.
You can use your credit cards, of course. They can be a great way of managing cash-flow. You just want to keep each balance in a range between 10% and 30% of its credit limit.
In 2019, Experian, which is one of the Big Three credit bureaus, built a profile of those with perfect credit scores. And it found:
People with FICO® Scores of 850 carried an average 6.4 credit cards compared with the national average of 3.8 credit cards. When it came to credit card debt, however, Americans with perfect FICO® Scores owed less than half the U.S. average: an average $3,025 compared with the national average of $6,445.
Even though those paragons of virtue with perfect scores had more cards than the average American, they kept their balances on each low. You should aim to do the same.
Don’t open or close credit accounts unless you need to
Fifteen percent of your credit score is based on the average age of your accounts: the older, the better. But every time you close a long-standing account, you make that average younger. And every time you open a new account, you do the same thing.
Indeed, your score takes a double whammy when you open new accounts. That’s because there’s a minor penalty every time you do that.
Don’t get too hung up on this. That penalty is typically only a few points. And, your score should recover within a few months, providing you make on-time payments during that time. But never make several applications for new accounts over a short period. It looks as if you’re in financial trouble, and sends your score appreciably higher.
Of course, nobody’s suggesting you should keep your current array of accounts forever. Sometimes, there are good reasons to close or open one. Just don’t do so unnecessarily or when you need your score to be as high as possible. For example, when you’re about to apply for a big loan (mortgage, auto loan …) or when you’re trying to boost your credit score.
Have a range of credit accounts
This accounts for only 10% of your score. But it’s a relatively easy one to get on top of.
Your score will do better if you have a mix of credit accounts. In the jargon, you want some “revolving” credit (almost exclusively store and credit cards) and some “nonrevolving” credit (installment loans, such as mortgages, personal loans, auto loans and so on).
Just to be clear, store and credit cards are revolving credit because you can borrow, repay and borrow again. With installment loans, you borrow a lump sum over a fixed period and repay it in equal (subject to changing interest rates) monthly installments.
Boost Your Credit Score and Live Well
Unless your lifestyle and your income mean you’ve plenty of money left over at the end of each month, you’ll probably have to make sacrifices to boost your credit score. Paying down card balances, for example, may mean careful budgeting.
You’ll likely find it easier to sustain your motivation if you don’t try to do too much in too short a period. With luck, you can leave yourself enough each month to live comfortably and have occasional treats.
Just keep your eyes on the prize. Imagine all those savings. You really could be tens or hundreds of thousands of dollars better off if you boost your credit score into the excellent range. That could see you living exceptionally well.
Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.