Cooking Up the Right Credit Score
It's undeniable: Your financial life will be easier if you have a strong three-digit FICO credit score. With a high score, you'll more easily qualify for new credit cards and loans, including mortgage and auto loans, with lower interest rates. This makes borrowing money easier and more affordable.
What credit score do you need?
Most lenders consider FICO credit scores of 740 or higher to be very good and scores of 800 or higher to be excellent.
In other words, if your score is 740 or higher, you'll generally qualify for credit cards and loans at lower interest rates. That's good news! A lower interest rate also equals lower monthly payments on loans. It also means that your credit card balance will grow more slowly if you don't pay it off in full each month. (Though ideally you should never carry a balance on your credit cards.)
If your FICO credit score is under 640, you might struggle to qualify for new credit cards and loans. If you do qualify, you'll be hit with higher interest rates, which makes borrowing money more expensive.
How do you build a strong credit score?
Fortunately, building a strong credit score isn't complicated, though it does require commitment and patience.
Here are the key steps:
- Pay your monthly bills on time. Certain monthly payments, including your mortgage, student, auto and personal loan payments, are reported to the three national credit bureaus, Equifax, Experian and TransUnion. Your monthly credit card payments are also reported to these bureaus. If you are more than 30 days late paying these bills, your credit score will plummet, possibly by 100 or more points. But if you pay on time each month, your score will steadily increase over time. You should also pay your other bills on time, even though late payments on them are not reported to the bureaus, because if you don't pay, the lenders behind them might eventually send them to collections. Collection notices do show up on your credit reports and will damage your credit score.
- Pay down your credit card debt. Your credit utilization ratio measures how much of your available credit you are using at any given time. The lower this number is, the better it is for your credit score. This means that you should do whatever you can to pay down your credit card balances, because that lowers your credit utilization ratio. Doing this makes sense even if you don't consider the positive impact on your credit score: You never want to carry a balance on your credit cards because of the high interest rates these cards charge.
- Don't close old credit card accounts even if you no longer use them. If you've paid off a credit card account and you no longer use it, don't close that account. The available credit on that card will counter any balance you are carrying on your other cards, lowering your credit utilization ratio. Keep the account open and remember to not make purchases with that card.