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The debt-free movement has taken much of the motivation out of managing and improving a person’s credit score. After all, why even bother if the ultimate goal is to shun debt completely.
But there are some very important reasons why your credit score matters beyond just getting the money you need at low rates. Your credit score is used in many financial decisions made on your behalf, some that you may not even know about.
Look at a few of those reasons to manage your score and you’ll see why increasing your FICO is so important.
Why Your Credit Score Matters
Your credit score isn’t just used to determine if you can be approved for a loan or credit card. These days many companies use your credit score. They use it to determine things like:
- Whether they should hire you for a job (good credit, good employee/bad credit, bad employee perception)
- What they should charge you for insurance rates (better credit = lower rates)
- Whether they should let you rent an apartment or office space
- How much of a deposit you have to put down to get services (think utility companies and cell phone companies)
There are other institutions that will use your credit score to determine business dealings as well. As you can see, there are many reasons why it’s advantageous to have a good credit score.
What is a Good Credit Score?
Let’s start by talking about what a good credit score is. We’ll use the FICO score chart for this example. Your FICO credit score can range anywhere from 300 up to 850. The breakdown of scores and their responsibility level goes like this:
- 300-579: Very poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very Good
- 800-850: Exceptional
Where are you at with your credit score now? Is it not quite as high as you’d like it to be? Here are some steps you can take to help raise your credit score to a higher number.
Steps to Take to Fix Your Credit Score
The following steps will help you raise your credit score higher. Work on them simultaneously if you can for the fastest results.
Pay off Any Unpaid Debts
When you look at your credit record (you can get one free copy per year at www.annualcreditreport.com) you may see old unpaid or charged off items.
It’s important to contact the companies listed and get unpaid items paid off as soon as you can. You can do this by using cash.
If the dollar amount of the unpaid items equals more cash than you have to spare, consider getting a loan to pay them off quickly.
You may want to use a peer-to-peer lending site if you don’t qualify for a traditional bank loan. Peer-to-peer lending sites specialize in helping people with poorer credit get loans.
You could also try and work out a payment arrangement with the companies to get the unpaid items paid off faster.
Paying those old debts off is important as it shows you’re responsible and eager to make amends for past money mistakes.
Pay Your Bills on Time
Paying your bills on time is vital to a good credit score. Whether it’s debt with a lender or a medical or other debt, being timely is important.
Schedule automatic payments for your bills if that will help ensure you don’t have any late payments.
Use Credit Regularly
Another way to raise your credit score is to show consistent responsibility with credit. In other words, use your cards regularly but pay them off regularly too.
For instance, you can put all of your gasoline or grocery charges on your credit card. Then, pay them off in full at the end of the month.
Keeping enough cash on hand to pay them off in full is important. It can be tempting to use that cash for other things if you forget you’ve got a credit card balance coming due.
By showing you’re responsible with using credit you’ll raise your credit score.
Keep Credit Card Balances Low
The credit bureaus use something called a Debt Utilization Ratio to help determine your credit score. Your Debt Utilization Ratio is determined by taking your total debt balances divided by your total available credit.
As an example, let’s say you’ve got $20,000 in available credit card limits on various credit cards. If you have $10,000 in balances on those cards, your Debt Utilization Ratio is 50 percent.
Any Debt Utilization Ratio above 30 percent can cause your credit score to drop. Work to keep your credit card balances at less than 30 percent of your total available credit.
Better yet, pay those balances off altogether. The lower your balances, the more responsible you appear.
Hint: The Debt Utilization Ratio on each individual card can matter too. Work to ensure that none of your credit card balances are near their limits.
Be Choosy About Opening New Accounts
It’s perfectly fine to open a new credit account occasionally. You may find a credit card with a lower interest rate. Or you may want to take advantage of a store discount.
However, opening too many new credit accounts within a short period of time can lower your credit score. Credit bureaus can get nervous if they think you’re about to accumulate a lot of debt.
They like to see you managing the accounts you have well instead. You can avoid making the credit card bureaus nervous by being choosy about new accounts you open.
Fix Your Credit Score
As you can see, your credit score really does matter. It can determine whether you can get a loan to buy a house. And it can even determine whether or not you will get a job.
Use the tips above to help raise your credit score to a higher number. Don’t let bad credit keep you from reaching your financial and other goals.
If you would like additional information, visit Credit College. The Credit College teaches people the tools they need to fix their credit themselves.
Have you ever had to remedy a bad credit score? If so, what steps did you take to do so? Share your thoughts in the comments section.
This is a guest post from Joseph Hogue. Joseph worked as an equity analyst and an economist before realizing being rich is no substitute for being happy. He now runs five websites and a YouTube channel on beating debt, making more money and making your money work for you. A veteran of the Marine Corps, he now makes more money than he ever did at a 9-to-5 job and loves building his work from home business.