Articles

Consumer article: Your Credit Score Matters. Here’s How to Increase It

Your Credit Score Matters. Here’s How to Increase It

If you care about keeping hundreds or even thousands of extra dollars in your pocket by securing a lower interest rate on a loan or a credit card, if you want the ability to borrow money when the need arises, or if you want your debt history to reflect positively rather than negatively on you in the eyes of a potential employer or landlord, then there’s good reason to be aware of your credit score — and the steps you can take to increase it.

Credit score is a figure calculated by tracking a person’s financial activities, including their payment histories on loans (home, car, education, etc.), rent, credit cards, utility bills and the like. Lenders use it to gauge a person’s creditworthiness, wherewithal to repay a debt and general financial responsibility. Credit scores typically are indicated as a FICO score (FICO is short for Fair Isaac Corporation). Three credit bureaus, Equifax, Experian and TransUnion, generate credit scores for a person, and those scores typically range from 300 to 850.

“They keep a file on you, essentially,” explains FPA member Michael Ciccone, a CERTIFIED FINANCIAL PLANNER™ (CFP®) professional with Tradition Capital Management in Summit, NJ.

Generally, a FICO score of 670 or above is considered good, a score of 740 or above is considered very good and a score of 800 or above is deemed exceptional. Scores tend not to differ much, if at all, between credit bureaus. The higher a person’s credit score, generally speaking, the greater their leverage to borrow money or to secure a line of credit, and to get favorable terms on those loans or lines of credit. On the other end of the spectrum, the lower a person’s credit score, the less leverage they generally have to obtain a loan or line of credit with favorable terms.

In short, your credit score matters. “It impacts some really important aspects of a person’s life — home ownership, car loan, credit cards, even job and rental property applications,” says Ciccone.

Want your credit score to work for you, not against you? The following recommendations from financial professionals can help to bolster a sagging credit score or make an already strong score even better.

  1. Review your credit report in detail at least once a year, and if you see anything suspicious — a credit card account you didn’t open, for example, or a credit application you didn’t make — contact the three major credit bureaus to initiate the process of removing those items from your report. These suspicious items on a credit report may mean you’re a victim of identity theft. So be sure to review your credit report on an annual basis. Visit www.AnnualCreditReport.com to access a free credit report from the three bureaus. 
  1. Avoid late payments — on any debt or line of credit, including mortgage, other loans, credit card balances, utility bills, etc. Late payments “are highly impactful on your credit score for a number of years. If you do happen to pay late for some reason, contact the lender right away to explain the situation and see if you can prevent it from being reported as late,” Ciccone suggests.

  2. Keep an eye on the credit card balances you’re carrying as a percentage of your overall available credit limit (across multiple cards, if you own more than one, and for each individual card) and try to keep those percentages low. “Carrying a high balance in proportion to your individual card limits and/or aggregate total available credit will negatively impact your score, potentially even if you pay it off in full each month,” Ciccone notes. He suggests keeping that credit utilization level at 5% or under.

“It’s not a bad idea to build up your available credit and keep those older cards active with at least occasional spending to ensure you have a larger credit pool for these calculations.”

As a general rule of thumb, try to avoid closing older credit card accounts that carry a higher credit limit, because those tend to factor positively into a credit score calculation, echoes FPA member Jan G. Valecka, CFP®, who heads Valecka Wealth Management in Dallas, Texas. Make most of your credit card purchases on a single card, and with other credit cards, “play the game of using the card once per year then paying it off to keep the line of credit open.”

  1. Be mindful of, and limit, how often you apply for credit. The number of times a person applies for credit within a two-year window impacts credit score. “But it is a bit of a balancing act,” Ciccone points out, because getting a new card increases a person’s number of credit lines, and their total aggregate credit limit, both of which can boost credit score. “New accounts will bring down your average age of accounts, which is a negative factor, but not hugely impactful. It may make sense, if you aren't planning any major financed purchases (house, car, etc.) in the next two years, to get a number of no-fee credit cards when you are younger. The negative impact of these [new accounts] will eventually fall off after two years, but the positive impacts (age of oldest account, average age of accounts, increased total credit limit) will remain.”

Ciccone says he tends to favor no-fee credit cards (those without an annual fee) unless a card with an annual fee generates enough points or rewards for the cardholder to merit using it. 

  1. Try giving yourself a “boost.” People with a limited credit history (those whose lack of credit/borrowing activity limits their ability to generate a credit score) now have access to a service via Experian where they can opt to let the credit agency see their banking account records so it can begin to develop a positive credit history based on payment activity from those accounts — making on-time payments for a cell phone, utilities, etc. The service, Experian Boost, is free. “It won't make a huge impact, but it also is guaranteed not to harm your score, so it may be worth a try,” says Ciccone.
  1. If you have a low credit score, consider using secured credit cards and secured loans to rebuild your credit score. With a secured credit card or a secured loan, explains FPA member Thomas I. Rindahl, CFP® with TruWest Wealth Management Services in Scottsdale, Ariz., a cash security deposit is used as collateral for a revolving line of credit (credit card) or a fixed-term loan. The amount of the deposit essentially becomes the credit limit on the account. “Pay off the credit card each month or pay the fixed-term loan as agreed upon and then the [financial institution providing the line of credit or loan] will report this positive info to the credit bureaus.”  
  1. Be wary of credit repair services. Most are a “waste of money,” asserts FPA member Peter T. Palion, CFP® with Master Plan Advisory in East Meadow, NY. Basically, a person may be better off taking steps (like the ones described here) on their own to remove negative items from their credit report instead of paying a credit repair service to take those steps on their behalf, according to a recent article from Credit Karma. 

May 2019 — This column is provided by the Financial Planning Association® (FPA®) and FPA of San Diego, the principal membership organization for Certified Financial PlannerTM professionals. FPA seeks to elevate a profession that transforms lives through the power of financial planning. Through a collaborative effort to provide more than 23,000 members with tools and resources for professional education, business support, advocacy and community, FPA is the indispensable resource in the advancement of today’s CFP® professional. Please credit FPA of San Diego if you use this column in whole or in part. The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION.  The marks may not be used without written permission from the Financial Planning Association.