Tips for Improving Your Credit Score
Are you thinking about buying a second home and want a favorable interest rate on your mortgage and homeowners’ policy? Or maybe you’re considering purchasing another car. Having a high credit score can mean better terms on credit cards, lower rates on mortgages and lower premiums on auto and homeowners insurance. It helps to know how your score is formulated and ways you can improve it as part of an overall healthy financial strategy.
Q: Do checks on my score cost me points?
A: A “hard inquiry” could lower your credit score by a few points, but just one hard inquiry should have a minimal effect on it. These inquiries generally happen when a financial institution, such as a mortgage company, checks your credit before making a lending decision. In certain instances, it may or may not be considered a hard inquiry, such as some rental applications. A “soft” inquiry usually happens when a person or company checks your credit as part of a background check, such as when a credit card company checks your score to see if you qualify for an offer.1
Q: Why should I check my score?
A: Regardless of your net worth, it’s a good idea to check your score at least annually to make sure there are no errors, fraudulent charges or delinquent payments you may need to dispute. You can request a credit report once a year for free from the three credit reporting bureaus: TransUnion, Equifax and Experian. You can request your reports at AnnualCreditReport.com. It’s a good idea to stagger your soft inquiry requests for a free report to every four months to keep an eye on your credit record all year.
Q: How is my score weighted?
A: There are two scoring models that determine your credit score number: FICO® and VantageScore®. The FICO number is typically used for home loans, while the VantageScore number is typically used for auto loans. VantageScore places an important score weight on utilization, meaning the percentage of debt you owe compared to your total available credit. The more commonly used VantageScore 3.0 places no weight on your history of use and payment information, while the 4.0 version puts some weight on those factors.2 Your FICO number is based on the reports from each of the three credit bureaus, and each may collect your credit data a little differently. Among some changes, the recently added FICO Score 9 now places less weight on medical debt and collections debt. Rental history is now factored into these scores, although landlords aren’t required to report tenants’ payment history.3
Q: How much credit should I use to improve my score?
A: A typical rule of thumb is to use less than 30 percent of your available credit each month and ideally less than 10 percent. One no-cost strategy to improve the percentage of debt you owe compared to your total available credit is to ask your card issuer for a higher credit limit.4
Q: Will carrying a balance improve my score?
A: It’s actually a misconception that carrying a balance will improve your score. According to Credit Karma, it actually hurts your credit score plus you’ll have monthly interest charges.
Q: Should I close an older credit card with a high interest rate?
A: Closing an older credit card shortens your overall age of credit and also lowers your amount of available credit, which could raise your percentage of utilization, a key measure in your overall score. A better strategy, according to Credit Karma, is to keep the older card open with an occasional charge that you pay in full or a with a small, recurring charge, such as a monthly subscription, that you can pay off monthly.
1“Hard and soft credit inquiries,” Credit Karma. https://bit.ly/2OCXUFB
2“What you should know about the VantageScore 3.0 credit scoring model,” Credit Karma. https://bit.ly/34cxlxN
3“What you need to know about FICO Score 9,” Credit Karma. https://bit.ly/2rgHkDC
4“9 Myths About Credit Scores,” The Wall Street Journal. https://on.wsj.com/37u4F57
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