What is good credit?
Five simple tips to improve your credit.
According to fico.com, as of April 2015, the average U.S. FICO score was 695. FICO scores are calculated based on the information in a credit report. Lenders review your credit report and score in conjunction with other factors to determine your creditworthiness. The FICO score is widely used and is calculated based on your payment history, the amount of debt owed, the length of credit history, new credit, and credit mix. According to myFICO, the break-down of FICO scores are as follows:
- Payment history (35 percent) – the history of how your debts are paid (including public records and collections).
- Amounts owed (30 percent) – the amount owed on all accounts.
- The length of credit history (15 percent) - how long your credit accounts have been established, including the age of your oldest account, the age of your newest account and an average age of all your accounts, and how long it has been since you used certain accounts.
- New credit (10 percent) – the number of new accounts you have by type of account.
- Credit mix (10 percent) – the mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.
Your credit report can be used when applying for a home, car, credit card, personal loans, insurance, etc. Generally, the higher your score is the better interest rate you will receive.
Because your score is calculated based on the information on your credit report, it is important to ensure that the information reported is accurate. Michigan State University Extension Educator Beth Waitrovich says it is important to check your credit report at least once every 12 months. Everyone can get one free copy of their credit report each year from each of the three major credit bureaus Equifax, Experian and Trans Union. To obtain a free copy of your credit report go online, call 1-877-322-8228, or complete the written annual credit report request form.
Checking your credit report regularly to ensure accuracy and disputing incorrect information are the first steps in improving your credit. Additionally, to help improve your score:
- Pay on time – payment history is the highest percentage of your FICO score, so it’s important to pay your bills on time. One 30-day late payment will negatively affect your score.
- Pay down your balance – amounts owed is the second highest percentage of your FICO score so it’s important to keep your balance low. Generally, 30 percent of your limit or lower is recommended (some suggest to keep it even lower than 30 percent) – for example, if your credit card limit is $1000, keep your balance at $300 or lower.
- Leave your credit card open – if you have a credit card with a good payment history, leave it open because closing it may negatively affect your score.
- Do not open too many new lines of credit at once – opening several new accounts at once can decrease the average age of your accounts and potentially lower your score.
- Apply for a small loan/credit card - if you do not have credit and are trying to build your credit history, you may need to apply for a small secured loan or credit card. Check your financial institution (bank, thrift, or credit union) and see what credit builder products they offer.
Taking these small steps can help you improve your credit. Remember it takes time, patience, and discipline to improve your credit. Visit MI Money Health for more information from Michigan State University Extension on improving your financial health and upcoming events.