So, you’re starting to set some bigger financial goals and realize your credit score is pretty darn important. Don’t worry – you’re not alone. A lot of people don’t start acknowledging the importance of their credit until it’s a tad too late. The good news? We have some ways to help you improve your credit score no matter where you are on your financial or professional path.
But before you get started, it’s important to understand the rules before you start playing the game. And this game’s rules are changing! A new way to calculate your FICO credit score will begin rolling out starting as early as the summer of 2020, and while each lender or credit reviewer can choose which credit score version to use now, it’s only a matter of time before the new FICO scoring could impact you.
WHAT’S CHANGING WITH MY CREDIT SCORE?
FICO scores will now be factoring in more of your extended credit history. As opposed to previous credit formulas that were affected by activities during the last six months, the newest credit score calculation will be considering everything as impactful from the last 24 months and possibly longer. This will give lenders more insight into how you manage your credit over time and better reflect the trajectory of your behavior.
That’s not all that’s changing. This new formula will penalize people longer and harder who have made late payments or who continually use a high percentage of their credit limit.
WHY DOES HAVING A GOOD CREDIT SCORE MATTER?
When the extent of your credit history consists of your first credit card, it can be hard to really grasp all the different ways that credit can affect you.
You can use those payments from your starter credit lines to build your score and eventually qualify to pay less interest on bigger credit products like mortgages, car loans or furniture purchases.
Having a high credit score can really pay off. It could qualify you for 0% interest credit cards or help get you approved to save upwards of 1% interest on a mortgage. That means if you bought a $300,000 home, you could be saving $200 a month on a 30-year mortgage. That’s $72,000 in savings!
However, if you are unable to obtain or maintain a higher score, you could be faced with higher interest rates and insurance rates, bigger down payments and even security deposits on utility bills. Credit can also be a valuable indicator for landlords when they are vetting potential renters.
HOW WILL THESE CHANGES AFFECT ME?
Most consumers will see a minimal fluctuation. However, FICO reports about 40 million people will see an upswing of about 20 points and another 40 million will see a drop in their scores. Depending on where your credit score sits, consumers with higher scores may see a spike while those with lower scores could see a fall.
But don’t worry, if your credit is not where you want it, you have time to build your credit before it’s impacted. In fact, many lenders will be slow to start using the newest scoring model, and some might not use it at all. While you can’t be certain how or when you will be affected by the new changes, you can be certain that beginning the process of building up your credit sooner rather than later is always going to be in your best interest.
TIPS TO IMPROVE YOUR CREDIT SCORE
Whether you’re buying that first home, paying off student loans or simply getting informed, these five tips will help you improve your credit score and set your goals in motion!
- Make your payments on time. Paying your bills on time can be one of the fastest ways to build your score while late payments are quick to decrease it. Setting up your account to auto-withdraw your minimum payment every month can easily help you avoid being late. If you know you’d want to make more than the minimum payment, you can always make an additional payment manually when you please. Making your payments on time will also avoid late fees which is always a bonus!
- Mind your balance. Many people don’t know that a big factor in credit scoring is how much revolving credit they have versus how much they’re actually using. In English? Even if you’re paying your balance each month, your score may reflect the balances you incur during the month. In other words, if you consistently charge $2,000 to your card, bureaus may see that as risky. Pro tip: Keep your balance to 30% or less of your total credit line within each payment period.
- Don’t close your lines of credit. There is “good” debt. No, really. Many people think that old debt on their credit report is bad news. But it can be a positive thing. “Good debt – debt that you’ve handled well and paid as agreed – is good for your credit,” says credit guru John Ulzheimer. *In short: Don’t close old accounts where you’ve had a strong repayment history, even if they’re paid off. Think of it as having A’s on your transcripts and then asking the dean to remove them years later.
- Aim for low-risk behaviors. Another leading metric that credit bureaus consider is potential risk factor. What does “potential risk” look like? Usually any sudden changes in patterns like paying less or charging more than you typically do and, of course, missing payments. Other “risky” behaviors: withdrawing cash advances or using credit for transactions that indicate financial stress (e.g., loans from a payday lender). In these instances, try to write a check or use your debit card.
- Check your report. The best things in life are free. Including credit reports. Yes, free credit reports exist! And we’re here to tell you to use them. Any credit expert will tell you it’s in your best interest to regularly view your credit report. After all, how can you fix something if you don’t know it’s broken? Everyone is entitled to a free credit report once every 12 months from the three credit bureaus – Equifax, Experian and TransUnion – through AnnualCreditReport.com. The trick: Stagger each freebie once every four months and you can monitor your credit for free, year-round!
- Sign up for Experian Boost. Experian Boost is a free service from credit bureaus that allows consumers to link the payment histories of their WiFi, cellphone or utilities bills to their credit score. On average, people who have done this saw their score go up by about 10 points!
If you leverage these tips to improve your credit score, you’ll be well on your way. And of course, we’re always just a click or visit away with various credit card options to get you on the right side of credit.