Raising your credit score above 800 will put you in rare company. So rare that only one out of nine Americans can claim they’re members of this elite club. The perks of having an excellent or perfect credit score (think 750 or higher) are undeniable. You’ll often have lenders fighting for your business, and in nearly all instances, you’ll be offered the best interest rate by lenders, meaning you’ll have the lowest possible long-term mortgage and loan costs of any consumer. Contrary to popular belief, racking up a high credit score is a lot easier than you may have imagined if you follow these strategies from The Motley Fool.
- Pay your bills on time
The most important factor of your FICO credit score is your payment history. Although FICO keeps its precise scoring formula a closely guarded secret, CreditCards.com has reported via FICO that about 35 percent of your score is derived from your payment history. If you have a number of late payments or collections, your credit score will take it on the chin. Yet, even if you have an occasional late payment, it’s often worthwhile to request that your lender forgive a late payment (assuming you’ve made your payment and are now current on your account).
- Set up as many automatic payments as possible
One of the best ways to reduce the possibility of a late payment is to set up as many automatic payments as possible for your credit accounts. Having your bills automatically deducted from your bank account on a specific date or charged to a credit card (assuming you pay it off monthly) ensures that you’re never late on your bills. Paying bills online through your bank also can be a particularly smart way to reduce your chances of being late with your payments. Not only do you avoid running the risk of your payment arriving and processing after the due date if you mail your payments, but online banking is exceptionally quick and makes record-keeping easy.
- Don’t carry a balance if you don’t have to
If you can, pay off your credit cards every month. One of the greatest misconceptions is that you need to carry a balance on your credit cards to improve your credit score, which just isn’t true. As long as you’re paying your bill on time each month, even if that bill is paid off in its entirety every month, then you’re going to see a long-term positive benefit in your credit score. Paying off credit cards in full every month helps reduce the overall cost of the goods and services you purchase since there’s no interest to be paid. It also helps keep your aggregate credit utilization down, which comprises about 30 percent of your FICO credit score.
- Don’t check your credit score each month
Another somewhat common misconception is that you need to stay on top of your credit score like a hawk. Your credit history is akin to a roadmap that lenders use to decide whether to loan you money, and if so, the interest rates for which you’ll qualify. It takes a lot of data points to paint an accurate picture for lenders. This means that your credit score can take a long time to adjust upward, especially given that your length of credit history contributes to about 15 percent of your FICO credit score. Limit your credit score checks to between two and four times annually. This will give you a bigger-picture look at your progress.
- Don’t be afraid to increase your credit limit
Cardholders should embrace the idea of higher credit limits. The idea here is simple: The higher your credit limits, the less likely you are to use more than 30 percent of your aggregate credit, which is the line-in-the-sand point where your credit score could be dinged. Yes, increasing your credit limit likely will involve your lender taking a hard look at your credit report, and it may result in a temporary loss of a few points on your credit score. But, over the long term, it could help lower your credit utilization rate, which will have a considerably more positive impact on your credit score as long as you remain responsible with your spending.
- Ask your lender to lower your interest rate
Asking your lender for a lower interest rate tends to work more often than not. The thing is, most cardholders don’t make this request because they are either afraid to do so or believe they’ll be told, “no.” Lenders spend far more money to bring in new customers than they do by caving in to a few concessions from those with excellent credit scores. If you ask for an interest-rate reduction, you just might get it, which means lower costs for you and possibly the ability to pay down your debt faster if you’re carrying a balance.
- Keep good-standing accounts open and use them from time to time
One of the biggest errors consumers make is closing good-standing credit accounts because they believe this will demonstrate to credit card companies that they can responsibly manage their credit. Unfortunately, that’s not how things work. The length of time your credit accounts are open comprises about 15 percent of your credit score. If your accounts are in good standing, leaving them open for an extended period of time will help your credit score.
- Only open accounts when it makes financial sense
Opening a credit account makes sense when it’s an exceptionally large purchase, such as a house or car, or when it’s a large purchase that would strain your checking or savings account. In other words, avoid opening multiple new credit accounts just to save 10 percent on that $29 shirt you want.
- Focus on your revolving debts first
If you happen to carry a balance on your credit cards, it’s important to focus on paying off revolving debts first. FICO actually takes into account the types of debt you pay when calculating your score. These two types of debt are revolving and installment. Revolving debts typically have higher interest rates and your minimum payment is based on the amount you owe. Department store credit cards are a good example. Installment loans are fixed loans of a lengthy time period, such as a mortgage or car loan. Paying down your revolving debts first often means paying less in interest.
- Check your credit report annually
Far too many consumers fail to check their credit reports annually, and it’s more likely than you probably realize that one or more of the three credit-reporting bureaus has an error on your report.