First off, what is a credit score? Your credit score is a number based on statistical calculations that are trying to predict the chances that a certain person will pay his or her debts in a timely fashion. The statistical calculations are based on several credit files held by several companies on the person in question.
OK…but why should you care?
You should care about your credit score because it will affect the willingness of banks and credit card companies to let you get a loan or finance a purchase. Secondly, your credit score might also affect the interest rate that you will receive on those loans, credit cards or other financial transactions.
"All right, so what can I do?”
Here are 5 easy and efficient ways to improve your credit score:
1. Pay your bills on time.
“Common Sense”, you say? Well, not for many people. If you happen to be one of those people who often forget to pay your bills or if you just don’t think it is a big deal if you’re a little late, you’re probably in for a headache or two. Late payments can largely affect your credit score (for the worse, obviously)
Make it a habit to pay the bills as soon as possible, and use the automatic system when available.
We all run into emergencies once in a while, but with just a little financial planning it is possible to avoid any late payments whatsoever.
2. Use your free reports
There are three major bureaus that combine to create your credit scores: Equifax, Experian and TransUnion. By law, everyone is entitled to a free credit report from each of those agencies once every 12 months.
It is a smart idea to request a copy of your credit report once every 6 months. This can also help you to identify if anyone else has stolen your identity or if you have any missed payment you are unaware of.
Getting used to how credit scores work and following your situation closely can help you manage and possibly increase your score over time.
You can get more information about these credit reports on AnnualCreditReport.com.
If you live outside of the U.S., just check with your local agency to see if they provide free credit reports as well.
3. Contact the credit agencies in case of mistakes.
Credit agencies are highly reputable, but as with any organization, they are bound to make mistakes once in a while.
If you decide to follow our previous tip and get your free credit reports, you will probably be able to identify any mistakes on your credit report easily. Look for late payments that were actually paid on time, wrong accounts and so on. As soon as you identify one, contact the respective agency to get it fixed.
Consider that it might take several months to remove a wrongly assigned, outstanding or late payment from your report, so the sooner you get the process going, the better.
4. Keep your accounts open as long as possible.
The average life of your credit card accounts will influence your final credit score. People with financial problems tend to open and close accounts more often than not.
Closing an account may also reduce the overall amount of credit available to you and shorten the life span of your credit files, which might affect your credit score negatively.
5. Remember that recent events weigh more.
A late payment that happened one month ago will have a much higher influence on your credit score than one that happened five years ago. As a result, if you were planning to get a mortgage or car loans in the near future, it would be a good idea to go into a credit score diet first.
Ideally, you want to monitor your credit score and start applying the tips we mentioned above at least one year before applying for a loan.
Too much effort? Impossible? Well, consider that just half a percentage point increase in your interest rate on a loan of $150,000 could already make you pay an extra $10,000 over the course of 30 years.
