Ah yes, the credit score
: People obsess over it and that's because it's important.
A pristine credit score can be the key to easy loans at the best interest rates -- over the course of a lifetime, this can lead to thousands of dollars in savings. (You'll pay less interest on your mortgage and car loan, for example).
What's a good credit score, anyway? FICO scores range
from 300 to 850; the average score is 680 to 700. You want at least that high. Even higher than a 700 is ideal.
The first step to cleaning up your credit score is seeing your credit
Once a year you are allowed to request your credit report, for free, from the three major credit reporting bureaus (Equifax, Experian and TransUnion). Go to AnnualCreditReport.com
to request yours. That site is truly free and will not request a credit card number. Avoid shady "free" credit report sites that rope you into monthly subscription plans or expensive "credit monitoring" services.
Your credit report will show financial institutions that have recently requested your report (a so-called "hard credit inquiry" or "hard pull"). It will also list all of your line-of-credit accounts, such as a Honda Motor Co. car loan or Bank of America credit card. It provides the status for each account, such as "closed/paid; in good standing" for a car loan you have already paid off in full, or "open; in good standing" for a credit card you still use.
Other information will include whether payment was received each month on time, length of time the account has been open, your credit line amount and the highest balance you have ever held on your credit line.
If you notice any
irregularities -- a Chase credit card you never signed up for, perhaps, or a bunch of weird institutions who have recently requested your credit report -- you may be a victim of identity theft. Identity theft is a leading cause of a damaged credit score. Contact the bank in question to get things straightened out. Once you have a handle on the situation, contact all three credit reporting bureaus (not just one of them!) and have them expunge the irregularities from your credit report.
Now, assuming your credit report is clean and free of any oddities, here are the easiest ways to quickly
clean up your credit score:
Improve Your Debt to Credit (or "Credit Utilization") Ratio
Many credit experts suggest you have a credit utilization ratio no higher than 30%, meaning you are only using 30% (at the most) of your available credit. So if your total credit line between all of your credit cards is $10,000, you should have an outstanding balance no higher than $3,000. You can easily improve your ratio in one of two ways: 1) get more credit, such as a new credit card, to increase your overall available credit amount or 2) pay down existing balances. Obviously, you should pay down your existing balances as much as possible. Don't go on a new credit card account spree; this will look bad, and could negatively impact your credit score since your score gets temporarily "dinged" when you apply for a new card. If you do apply for a new credit card account, look for a 0% APR credit card
with optimal terms; you want at least 6 billing cycles of 0% APR, preferably 12. Also be on the lookout for any hidden fees, such as a 3% balance transfer fee. The credit card environment is
less lucrative for new account holders than it was a few years ago, but every customer should still expect some kind of introductory rate before the regular purchase APR kicks in. If your card isn't offering you 0% interest at the beginning, it's a weak offer. Take your business elsewhere.
Have Different Forms of Credit Available to You
If you only have credit cards, you may see an improvement in credit score once you have a different forms of credit available to you -- a car loan, for instance. Different forms of credit can lead to a better score over time. Of course, don't just take on a new loan to improve your score. That's a bit counterintuitive, since the whole point of an excellent, clean credit score is to secure a new loan on the most favorable terms, at the lowest interest rate possible.
Make All Payments on Time
You don't want any of your accounts to be in default, so always pay on time. Late payments damage your credit score and also appear on your credit report. If any lender has improperly labeled your account as late or in default, contact them immediately to have your report corrected.
Enjoy the process of cleaning up your credit score. It won't be an overnight fix; avoid companies and schemes that offer you "instant" results -- they're likely to be scams. And keep things in perspective. Your credit score is
an important component of your overall financial health, but it isn't the only piece of the puzzle. You can also improve your financial health by lowering your outstanding debts, putting money into tax-deferred accounts such as 401(k) plan, reducing "optional" luxury expenses and boosting the amount of after-tax income you are able to put in a savings account, money market fund, or IRA. A great credit score with no money in the bank isn't terribly helpful, after all.
You can always find more financial help at AOL's Daily Finace