This month’s personal finance tip from The Ascent (a Motley Fool service) focuses on credit scores, which of course are key to so many areas of our financial lives.
Maintaining a strong credit score can easily wind up saving you thousands of dollars per year through access to things like lower mortgage rates, the highest rewards credit cards, and even better car insurance rates.
The good news is, what goes into your credit score isn’t a black box — we share the formula needed to raise or maintain your credit score below. 20% of Americans have a credit score of 800 or above, and the tips below can help you get there and even push for a perfect 850 score.
How FICO credit scores are calculated
• Payment history: 35%
• Amounts owed (credit utilization ratio): 30%
• Length of credit history: 15%
• Credit mix: 10%
• New credit: 10%
Tips for increasing your credit score
1. Check your credit report regularly and dispute inaccuracies
Surprisingly, it’s actually pretty common to find errors on your credit report. You can check your credit report for free once per year with each of the three credit bureaus at the official government website, AnnualCreditReport.com. If you find something fishy, dispute it with the credit bureau.
2. Autopay is your friend
As long as you trust the institution and you have a way of disputing an incorrect transaction that sneaks through, setting up autopay can be a lifesaver for maintaining a strong payment history.
3. Reduce your debt in order to improve your credit utilization ratio
This one is obvious, but it’s so important that it needs to be said. If you’re paying interest on credit card debt, the smart move is usually to transfer it to a balance transfer card to pay 0% interest for as long as 21 months while you work to pay off the debt. See our top-rated balance transfer cards here.
4. Don’t close out old credit cards as long as they don’t have an annual fee
This one surprises some people, but closing a credit card can lower your credit score by impacting both your length of credit history and your credit utilization ratio. Even if you’re not using the card anymore, consider keeping it open as long as there’s no annual fee.
5. Ask for a credit limit increase
Simply asking your credit card company for a higher credit limit has a decent shot of working, and is one of the most low-effort ways to help your credit score.
6. Add to your credit mix
Showing potential creditors that you can manage more than one type of account can help your credit score. But this one comes with a caveat: we never recommend taking on more debt for the sole purpose of building your credit score.
Over the long term (and as long as you’re using them properly), a new credit card can be a boon to your credit score — and can earn you some serious rewards too. See our expert list of top credit cards by clicking below.
Director, The Ascent
P.S. Here at The Ascent, we strive to bring you the most helpful and valuable personal finance tips that we can. If you have any feedback for us or thoughts on what areas of personal finance you’d like our input on next, please let us know by emailing email@example.com