Now is a great time to employ healthy credit habits. By paying your bills on time, keeping your utilization low and having a mix of credit accounts, you’ll be able to strengthen your credit – and keep it strong.
Although it’s hard to believe it right now, the first day of spring is March 20. With spring on the horizon, now’s a great time to clean up your credit.
First things first, begin by pulling all three of your credit reports and go over them carefully. Usually, you’re entitled to one free credit report each year from each of the three major bureaus (Experian, Equifax and TransUnion). But through the end of April 2022, you can access free credit reports weekly. So right now is the best time to get all three and examine them side-by-side, which makes it easier to spot errors. To pull your credit reports, go to annualcreditreport.com.
If you do find errors, the dispute process is fairly simple and can be found at any one of the bureaus’ websites. Take the time to do this and then make a note to check back in 30 to 45 days to be sure the problems have been corrected.
Review FICO’s factors
Remember that your FICO score is derived from five factors, worth varying percentages to the total: payment history (35 percent), credit utilization (30 percent), credit mix (15 percent), credit history (10 percent) and new credit (10 percent). Except for credit history, all of these factors are within your control.
Thirty-five percent of your credit score is based on your payment history, making it the most important FICO factor. Make sure that all your bills are paid on time every billing cycle. If you struggle with this, automate your payments. You will need to be sure you have funds available when those payments hit. So, you’ll need to know how much money you have in the bank at all times. You can also explore receiving notifications from your bank if your balance hits a certain point.
Next, take a look at your credit card balances because 30 percent of your score comes from credit utilization. If you have any that are at more than a 25 or 30 percent utilization (meaning the percentage of your total credit line you have used), paying those down to 25 percent or less will help a lot. If you are already at that level, try to get them down to single digits. Besides boosting your credit score, reducing your balances will also help your overall financial health.
You might also consider making payments on your accounts more than once a month, especially if you put most purchases on credit cards. If you charge most everything to a credit card, earn rewards then pay it off each month, you won’t get into debt and you’ll earn something back for your spending. The problem with that, though, is that your card could hit a high credit utilization by the end of the billing cycle – even if you pay it off in full. If your issuer reports your card before you pay, your score is going to reflect that high utilization. You can alleviate this problem by making payments more often, such as twice a month instead of just once. Or, if you make a really large purchase, you might consider paying it off immediately. You will still earn your rewards, but you won’t take a credit score hit (even though it might be short-lived).
See related: The 30% credit utilization rule is a myth
If you have been a good customer, your card issuer may be open to increasing your credit limit, which will lower your utilization. But you should know that this could result in a hard inquiry to your credit report, which might temporarily bring your score down. The best time to ask for an increase is after a year of demonstrating you’re a good customer, your spending level has risen and your credit is in otherwise good shape. If you are successful in getting the limit increased, any dip from a hard inquiry should be more than outweighed by the decrease in your utilization. Some issuers don’t do a hard pull, so you could ask yours what their policy is and then make your decision.
You might also want to consider adding another card or account to your portfolio. Your credit mix will get stronger if you have multiple types of credit (for example, a credit card, a mortgage and a car loan). If your credit mix needs bumping up (you only have credit cards, for instance), you might consider a small personal loan with a fixed payment. This can be especially helpful if you have credit card debt with high interest rates. Taking a personal loan to pay off that debt will increase your mix and reduce your utilization. And if you get a lower APR, you can also save on interest. With this though, you are probably looking at a hard inquiry, which will affect your score. And again, be fairly sure that you will qualify before you take it out.
While I do not recommend chasing a perfect credit score, I am all for doing the things that can improve the score you do have. Even more important will be to continue those good practices all year long. Come next spring, you may not need a full-on cleaning, but just a touch-up.
Remember to keep track of your score!