How to Get a Better Credit Score

There have been big changes recently in how our credit scores are reported and calculated. Credit scores are so important since they are used to determine everything from how much we'll pay for a home, car, or apartment to if we'll land a great job. Scores range from 300-850. While only 11% of people rank above 800, over 30 million, yes million people are considered to have severe credit, scoring below 620 (MSN Money). Having bad credit is dumb because it costs so much more money in the long run. Here are a few simple steps that you can take now to better your credit score:

  1. First, pull your credit report to determine the accuracy of what is on your records. You can reference my former post here on how to get a completely free credit report from each of the three major credit bureaus once per year. If any information is incorrect, contact the respective agency immediately. You can even submit corrections online.

  2. Stop being enticed by stupid offers. During my college years, credit card lenders would line the center student union with tables of free T-shirts, hats, and stuffed toys if you filled out a credit card application. So many students signed up for these offers for a free something or other. Post-college folks fall for similar gimmicks. Ever applied for a store card for a one-time discount, coupons, etc. Don't do that! This is because every time your credit report is accessed (by someone other than you) for a credit inquiry, your score is lowered. Shop for the best credit card offer first, then apply & only in that order.

  3. Be obsessive about late payments. Aside from a major negative event like foreclosure or bankruptcy, paying bills late is the single most damaging thing you can do to your credit. Do whatever you can to pay all of your bills on time. Try a filing system, online bill pay, paying over the phone or any other technique to keep you on track.

  4. Watch your "percentage" of credit limit usage. Knowing not just your credit limit but the percentage that you are using each month is the key to a better score. If, for example, you have a $5,000 credit limit and your balance is $2,500, you are using 50% of your available credit. Your credit score looks at the sum of your available credit to what you are using. This means that if you have to take into account what percentage of credit you are using overall. Consider the following example:

    Credit Limit BalancePercentage Used
    CC #1 $1,000$50050%
    CC #2 $500$500100%
    CC #3 $5,000$3,50070%

In this example, you would add each of the total credit limits and balances for an overall score of 70% usage of your credit limit. You want to shoot for using no more than 30% of your total available credit; the lower, the better.

This is important even if you pay off your statement in full each month. Credit card companies report what the last statement balance was without mention of whether or not it was paid in full. This means that if you have a balance of $1,000 and a limit of $1,000, you are still using 100% of your available credit and that's a no no.

5. Don't necessarily run to close your credit card accounts. Because of what we just discussed, not closing your credit accounts is as important as opening them. Think about our example above. If you closed the first credit card, because say the interest rate was too high, your percentage would rise to 73%, if you closed the second card instead, your percentage would only decline to 67%. It's more important for the credit companies to see that you can handle multiple streams of credit. Remember, changing the number of accounts you have alters your percentage just like a credit balance. The exception would be for those of you who do more harm than good with credit cards such as overspending or difficultly paying bills on time.

6. See how you stack up. Don't want to pay a fee for obtaining your credit score? I found a credit score estimator at Bankrate that gives you a rough estimate of where you stand. Try playing around with this tool as you manage your credit to see how your score changes.