Are you interested in renting a home, getting an auto loan, securing a mortgage, or opening a credit card? Then be prepared for lenders to look at your credit score.
A credit score is a three-digit number that lenders use to predict your behavior as a borrower, including whether you’ll make payments on time. It’s calculated using several factors, such as your payment history, total unpaid debt and how much available credit you’re using, according to the Consumer Financial Protection Bureau.
A high credit score means that you’re more likely to secure favorable interest rates and credit limits.
Here’s the lowdown if you’re looking to improve your credit score — or start from scratch — in the coming year.
The perfect ‘recipe’
Attaining a high credit score comes down to three key factors, according to Gregory Germain, a law professor and director of the Bankruptcy Clinic at Syracuse University College of Law.
“The recipe for getting a high score is pretty simple: you need to have a lot of credit available, low utilization of that credit, and most importantly a long history of making on-time payments,” he told The Independent, in an email.
If your credit score has dropped and you’re looking to rebuild, it’s important to start by addressing current debts, according to Germain.
“To rebuild your credit, you first need to get some credit, which is often the hardest part if you have a low credit score (or have no credit history),” he wrote. Germain suggests starting small by applying for an unsecured credit card with a small credit line, and always making on-time payments.
Fostering a healthy attitude to your finances is crucial, since having a high credit score “does not mean you are a smart money manager,” Germain noted.
Developing “responsible money management habits,” including spending less than you make and avoiding unnecessary spending, will help rebuild your credit and save money in the long run, he explained.
Pay in full – and on time
Germain recommends paying off your credit card balance in full each month by the due date. This will help you avoid interest charges. However, there’s risk that a last-minute payment won’t be processed on time, especially if you’re mailing a check, Germain said. That’s when paying early could be helpful.
“Because interest rates on credit cards are so high, a smart money manager will get in the habit of paying their credit card balances in full every month before the due date,” he wrote.
“Running a balance, and paying double-digit interest rates for the privilege, is a recipe for failure.”
Set up automatic credit card payments
Setting up autopay is a good way to ensure payments are made on time. Many major credit card providers will allow you to set up automatic payments that withdraw from your checking or savings account every month.
“To assure that your payments are made on time, you can set up automatic [automated clearing house] payments initiated by the credit card company from your bank account for your full balance each month – you just have to be sure to have sufficient funds in your account to cover the automatic payments each month,” Germain wrote.
Check your credit report for mistakes
Dr. Carly Urban, an economics professor at Montana State University, recommends that consumers check their credit report to ensure there are no mistakes.
“Sometimes there are recording errors that have large credit score consequences,” Urban wrote to The Independent.
If you discover an error, the U.S. General Services Administration suggests sending a letter with supporting documentation to either the credit reporting agency or the company that gave the incorrect information.
Watch out for scammers
Stay away from anyone who claims they can instantly improve your credit score for a fee, Germain warned.
“Be very doubtful about shortcuts to rebuilding your credit,” he wrote. “There are many crooks out there offering to immediately rebuild your credit for a generous fee. Credit rebuilding gimmicks will not work, and will cost you an excessive amount of money. The credit repair industry is rife with fraud.”
This article is sponsored by Credit Karma. We may earn a commission if you engage with their services using links in this article.