You probably know that your credit score affects your ability to get a loan or credit card, but did you know it can affect your ability to rent a home, get affordable insurance, qualify for government benefits, and even land a job? Credit scores have a surprisingly far-reaching effect and can influence many aspects of your life, but unfortunately many people don’t realize that until it’s too late.
A good credit score can save you money, but having a poor credit score is expensive. Here’s why: Let’s say an unimpressive credit score causes you to pay just 1% additional interest each year on a $200,000 fixed-rate mortgage. That could cost you over $45,000 in extra interest over 30 years. If you invest that money instead, it could mushroom into more than $140,000, even with a moderate 7% annual return. Don’t believe me? Use the MyFico Loan Savings Calculator to find out how much interest you could save by simply increasing your credit score.
It’s time to stop underestimating how important credit scores are for achieving financial success. Here are seven steps to boost your credit score as fast as possible:
Step #1: Correct Credit Errors
Since your credit score is calculated from the information in your credit report, you need to check your report regularly for errors – and correct or dispute credit errors you find. You can download a free copy from each of the three credit agencies—Equifax, Experian, and TransUnion—once a year at annualcreditreport.com. This site will not give you your credit score, but you look at how to get a free credit score through a MyFico.com trial or through Credit Karma.
One of the quick and dirty tips that I give in my new book, Money Girl’s Smart Moves to Grow Rich, is to space out your requests so you get a report from a different agency every four months. Read the entire report, look for mistakes in your personal and financial information, and report any errors to the credit agency right away. By the way, checking your own credit report doesn’t damage your credit score.
Step #2: Get Current on Late Payments
A component that makes up a big chunk (35%) of your credit score is whether you pay your bills on time or not. Get caught up on any overdue payments and stay current with all your bills. Never let an item go to a collections agency because it will linger on your credit report for seven years, even if you pay it off.
Step #3: Reduce Credit Card Balances
Having a large amount of credit card debt relative to your available credit limit is a drag on your credit score. Never let your “utilization ratio” exceed 30%. By that I mean if you have a $3,000 credit limit, don’t allow your balance to creep up over $900 (30% of $3,000)—even if you pay off your balance in full every month. You’re better off having two credit cards that each have balances below 30% of their limits than one card that’s maxed out.
Step #4: Use Older Credit Cards
Though you should keep a lid on your credit utilization, don’t forget about an older card that you haven’t used in a while. Instead of canceling it, keep it active by making occasional charges that you pay off in full. That helps your score by lengthening your credit history and by increasing your available credit.
Step #5: Get a Mix of Credit Types
Though you’d be wise to avoid credit cards if you’ve gotten into trouble with them in the past, not having one can hurt your credit score. Having both credit cards and installment loans (like a mortgage or a car loan) and managing them responsibly will boost your credit.
Step #6: Open New Credit Accounts Slowly
It’s a fact that you need a mix of credit accounts to build up a solid credit history—but don’t overdo it. Opening too many new credit accounts will ding your score because they lower your average account age. Also, a rash of new accounts or credit inquiries that appear within a short period of time on your credit report looks risky to a potential creditor.
Step #7: Do Your Rate Shopping Quickly
When you’re searching for a new loan or a refinance, make all your applications to lenders within a two week period. In general, having multiple inquiries on your credit report is harmful; however, it isn’t counted against you when you’re obviously shopping for a particular product like a mortgage or a car loan within a short time frame.
Following these seven steps won’t give you perfect credit overnight, but they can make a big difference in as little as two or three months. It comes down to managing your bills and credit accounts responsibly over time so you demonstrate a pattern of good financial behavior. Any company or individual who says they can “fix” your credit or erase bad marks on your credit report probably also has swampland in Florida to sell you.