Credit scores range from 350-850. According to FICO, the most widely used credit scores among lenders, consumers with high credit scores have increased.
Consumers with higher credit scores have cut spending and paid down debt while consumers with lower credit scores are experiencing economic difficulties such as loss of employment.
Most lenders consider people with FICO scores of at least 760 to be prime borrowers, and generally charge them interest rates that are low. There is probably not much more value for having 800 or above credit scores besides bragging rights.
But if having an 800 or above credit score is your desire, two fast ways to boost your FICO score are:
- Pay-off all credit cards to zero balance except one. The one credit card you maintain should have a small balance (do not use more than 10 percent of your available credit limit).
- Let your credit age. Do not apply for any new credit.
For some consumers building a strong credit history and demonstrating an ability to manage different types of debt—such as credit cards, car loans and mortgages may take some months or even years.
Here are a few more tips to get near-perfect FICO scores:
1. Stay ahead of your credit reports.
You are entitled to a free credit report from each consumer reporting agency once every 12 months by ordering at: annualcreditreport.com. Review your credit report for accuracy, making sure there are no mistakes. Big credit score killers are late payments, collection accounts, charge-offs, bankruptcies, judgments and under-reported credit limits. Dispute negative credit information, inaccurate or outdated information and always request deletions.
2. Monitor your credit scores.
Credit scores can change daily, depending on the number of creditors you have reporting to the credit bureaus and the information being reported. If you are in the market for an auto or mortgage loan it is especially important to monitor your credit score before you apply to eliminate any surprises. Ordering your credit report and score will not adversely affect your credit scores. You can pay for all three of your FICO scores at myfico.com.
3. Pay bills within the grace period.
Credit card companies and lenders report late payments once you are 30 days past due. A high credit score can decrease as much as 100 points for one late payment. If your credit score is low, the decrease in points will not be as much; but nevertheless, any points your credit score suffers due to late payments is significant. If you are late paying begin paying on time immediately and your credit score will recover within several months.
4. Pay more than the minimum due.
Paying more than the minimum not only helps you get rid of debt faster, you also put more money in your pockets by paying off debt sooner. Paying more than the minimum will especially help improve your credit score if you are maxed out or close to your credit limit. Having a credit card balance at or near the credit limit will hurt your credit score.
5. Work with your creditors if you fall behind.
Credit card companies and banks may negotiate a payment plan if you get behind on payments. There usually has to be an acceptable hardship that has occurred such as loss of income or illness. Banks want your money, not a charge-off or risk of a customer filing bankruptcy. If you fall behind request more time to make payments or request a revised payment structure or even ask about rehabilitating a delinquent account. You have options, use them. Creditors will sometimes make a goodwill adjustment to remove late payments.
6. Use 10% or less of available credit.
Using 10% or less of your available credit limit will help you obtain a higher credit score. Reducing your credit card balances to 10% or less of your credit limits will have an immediate positive effect on your credit scores. If you want a real boost in credit scores, reduce your account balance to 7% or less of your available credit limit. FICO recently released a few tips of consumers with the highest credit scores. Consumers with 7% or less utilization of available credit had the highest credit scores.
Consumers should also avoid carrying a balance, even if it is small on every credit card in their wallet. For example, if you have 5 credit card accounts at least 3 of those cards should have a zero balance. Reducing your debt load on revolving accounts (credit cards) is probably the most important action you can take, besides making on-time payments, to boost your credit scores. The FICO scoring system likes to see as much space as possible between your balance and your credit limit.
7. Create a good credit mix.
The best credit scores usually come from a variety of credit accounts including a mortgage loan, auto loan, major credit cards and a few store credit cards or a gas card. The types of credit you have have (credit mix) accounts for 10% of your over all credit score. When a bank or lender extends an installment loan such as a personal or auto loan it can do wonders for your credit score. More weight is given to installment loans when calculating a credit score.
For consumers with low credit scores it may be difficult to get an installment loan. If this is the case try a secured personal loan product. Credit Unions often offer credit builder loans which report to the 3 major credit bureaus. This does not mean you should make a major purchase such as an auto loan just to get a good credit mix. Use credit wisely and do not apply for new credit too frequently. Put 4-6 months between new applications for credit.
8. Re-establish your credit history.
Re-establish your credit history by opening new accounts and making on-time payments. You may have to start with a credit card designed to help build credit or perhaps even a retail credit card. If you can afford the payments get a personal loan to help re-establish your credit history. Paying the new credit on time and responsibly managing the new credit will raise your credit scores in a matter of months.
9. Keep Old Accounts Open
Finally, keep old accounts open even if you no longer use them. Your credit score may be benefiting from the card’s long history. Closing older accounts could cause your credit history to appear shorter and could harm your credit score. It is better to keep the account open and not use it or just use it from time to time with very small purchases.
Closing credit accounts in general is not a good idea. Closing a credit account, whether it’s store-issued or bank-issued has the potential to harm your credit scores.
Here is why.
Your credit score takes into consideration credit utilization ratio. This ratio looks at your total used credit (balances) in relation to your total available credit (credit limits). The more credit you are using; the higher this ratio is. This can negatively affect your credit score.
When you close credit card accounts, you are essentially wiping away some of your available credit which makes it look like you’re using more of your available credit.
Let’s say the total account balances owed across 2 cards is $1800:
Credit Card A Limit: $3000 (amount owed $1500)
Credit Card B Limit: $2000 (amount owed $0)
Credit Card C Limit: $1000 (amount owed $300)
Total Available Credit: $6000
Your credit utilization ratio is ($1800 balance divided by $6000 limit) which equals 30 percent credit utilization. Keeping credit card utilization to 30 percent is considered a good threshold for credit utilization but as we discussed 7 percent is optimum.
Now suppose you close Credit Card B. You can no longer count the $2000 card limit in your utilization ratio. Your new credit utilization ratio is now ($1800 balance divided by $4000 limit) which equals 45 percent credit utilization.
You can see that by closing credit accounts, credit utilization ratio rose from 30% to 45% – this can hurt credit scores.
Overall it’s just best to leave old or unused credit accounts alone. Closing them has no positive effects.