So you’ve come to learn that your electronically developed credit score, although just a number, follows you as a shadow does on a sunny day. Your financial shadow influences your loan rates, mortgage rates and hovers over all of your financial dealings – even being a determining factor in renting an apartment or house. In the loan arena, this number helps determine whether you can save hundreds or thousands on just interest alone. Your score can be massaged into a larger shadow providing you with many more financial benefits. There are many different scoring systems but the most important one is the score by FICO (Fair, Isaac & Company). You can see this score for free online from myfico.com. The FICO score is the American standard used by more than 90% of the lenders in the US, so here are four simple steps you can take to improve your score.
1. Get a Credit Card (Even if you already have one)
a. If you’re a starter and have no credit getting approved for one can be difficult, but you can easily obtain a secured credit card from Capital One among other places. A secured credit card is the same as a regular credit card, but requires a refundable security deposit which doubles as your credit limit.
b. If you’ve been with your only credit card for over a year now adding a new one can boost your score by bringing diversity to your credit. In the long run this can be very helpful by also boost your average length of credit, a very important part of your score.
2. Open different types of accounts (Loans, Credit Cards, Line of Credits, Mortages)
a. A credit card alone isn’t enough to show a lender that you’re worthy of taking on a loan, or a mortgage. By having more experience with different types of credit related accounts, you can boost your score by several points while showing lenders more credit worthiness.
3. Don’t Carry too many balances on different accounts
a. The only accounts that should be carrying a balance are loans and mortgages. It is okay to carry a balance on your credit card but the interest rates don’t make it worth it. Carrying a balance is excellent as it shows that you’re capable of making long term commitments, but having too many carrying balances appears risky and mismanaged, hurting your score.
4. The 30% Rule – Keep your total balance below 30% of your total available credit
a. In other words, all of the accounts that contain credit limits combined should not have an amount owed value that is greater than 30% of the total credit limit on all of those outstanding accounts. For example, never spend more than $300 on a card that has a limit of $1000.00. The less, the better. According to FICO, their high achievers use an average of 7% of their total available limit. Whether you pay each month’s balance in full or not, using too much of your available credit shows higher risk, hurting your score.
Your credit score is really just a reflection of how risky you are to lenders and often income is irrelevant. As long as you make an income that is sufficient in paying bills you can get approved for a variety of accounts. I am 22 and have two American Express cards as well as two Chase credit cards, including the metal Chase Sapphire Preferred card and make less than $20,000 a year as a college student. I also have a $15,000 line of credit and am preapproved for a $25,000 personal loan by Discover, (an offer I do not need). That’s not amazing but it’s just an example that shows income often isn’t related to the type of accounts you can obtain as well as your score.