If you use credit, have a loan, or even ever considered getting one, you've heard of your credit score. Based on information in your credit reports, the FICO score is used in 90% of lending decisions, according to myfico.com.
While the exact combination and formulation of the score is a closely-guarded secret, the factors that can improve your score are public knowledge. There are tangible, strategic actions you can take to increase your score and improve your rating, giving you access to better loan products and lower interest rates. Most of these are strategies you can implement without changing the amount of money you spend each month; the system works a certain way so make sure you know how to work it.
Know your score
This one seems obvious, but many people have no idea where they stand on the spectrum. This one doesn't need to cost you a dime, as The Fair Credit Reporting Act (FCRA) mandates the three credit reporting agencies Equifax, Experian, and TransUnion provide you a copy of your credit report every year, upon your request, for free. You can always pay for the report if you've got money to burn, but annualcreditreport.com is the government site where you can get it free. Check it for accuracy, look at the positive and negative information, and note your score. Alternatively, you can also get your FICO score directly from the Fair Isaac Corporation, but this option will come at a nominal cost.
Use your cards, just not too much
The best way to improve your credit is by using what you have responsibly. Keep your total use of credit cards under 30% of your total available credit limit. We're talking about the amount you use and pay off every month, not the amount of debt you carry. If you can, using 10% of the limit will help even more.
Don't close the cards you pay off
You save and scrimp, finally pay off the balance on that card and in a cathartic moment of happiness, cut up the card and throw it away, thinking that will help your credit score. Wrong. Older accounts are a positive indicator and reducing your overall available credit limit makes you less appealing to lenders. That's two reasons to leave that card open.
Have more than credit cards on your credit report
Lenders like to see a variety of credit products. If you have a mortgage or auto loan already, this should do the trick. If you don't, consider taking out an installment loan to pay off a balance on an existing card to improve your score.
Credit inquiries show up on your credit report. If you're shopping a loan like a mortgage or an auto-loan, multiple entries within a 30-day period will only count once. A continual habit of applying for credit at multiple institutions does not look good. Pick your window and stick to it.
Pay those bills on time
This last one is obvious to most people, but we have to mention it. Late payments hurt your credit. Prioritize your budget to pay at least the minimum amount due every month.