April 09, 2015
Having a good credit score isn’t good enough. To land the best loan deals and qualify for the best credit card offers you need to have a seriously great FICO credit score of at least 740. Here’s how to improve your FICO score.
1. Pay your Bills on Time.Your payment habits –whether you are on time or habitually late-account for 35% of your FICO credit score. You have zero excuse for not nailing this.
2. Charge Less on Your Credit Cards. You know I am a big believer in pay as you go: use cash or a debit card that does not have overdraft protection. That way you only spend what you have. At the same time, I want you to use a credit card a few times a month. Debit card payments aren’t tracked by the credit bureaus, so you need credit card charges to help build a credit score. The trick is to only charge a few items a month, and then pay off the bill in full. By limiting your credit card balances-and paying them off-you will have a great debt-to-total credit ratio. This is a formula that accounts for 30% of your credit score. The formula divides your total outstanding credit card limits by the amount of your existing unpaid balances. The lower the ratio the better. Aim for less than 30%.
3. Check Your Credit Report. Your credit score is calculated based on information in your credit report. The sad reality is that credit reports often contain lots of mistakes that can pull down your credit score.
You have a credit report from each of the three credit bureaus: Equifax, Experian and TransUnion. The credit bureaus are required to give you a free credit report once a year. The only place you should request a credit report is at annualcreditreport.com. Once you have a report scour it carefully. If you find a mistake-such as a debt you paid off that is still showing up as unpaid-follow the directions to submit a dispute.
4. Don’t Fall for Store Credit Cards. I know it’s tempting when you’re checking out and are enticed to sign up for a store credit card to qualify for a discount. Resist the temptation! Opening new credit will cause your credit score to take a temporary dip. If you don’t need the credit, don’t take it! And besides, store credit cards are the worst deal around, as they charge insanely high interest rates.
Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.