Building your credit score is an important goal for every responsible adult.
Having a high credit score will help you qualify for home and car loans at the lowest interest rates, and the scores are also being used to set home and automobile insurance rates.In fact, your credit score can even be a factor in some pre-employment background checks.
And while the exact FICO formula used to compile credit scores are a secret, enough factors are disclosed to draw some fascinating conclusions about how you can improve your credit score in some surprising ways.
Here are five ways to improve your credit score:
1. Don’t Cancel Existing Accounts
Credit cards and other types of loans have gotten so many people in trouble with debt that some feel that closing their accounts will help their credit score.
It won’t. Your current credit cards and other open accounts help your score by contributing to both your length of credit history and your debt to credit ratio.
2. Open a New Account
Opening a new account could actually help your credit score. For a given amount of debt, being granted new credit will lower your debt to credit ratio.
But unfortunately, opening too many accounts at once will negatively affect your score.
3. Ask for a Credit Limit Increase
Like opening a new account, getting a credit limit increase will lower your debt to credit ratios for a given amount of debt. But again, don’t ask for a credit limit increase on all of your accounts at once, as this will generate too many recent inquiries.
4. Open Different Types of Accounts
One of the factors that can raise your credit score is to have several different types of accounts like credit cards, a home mortgage, or other installment loans. So while you shouldn’t open many new accounts just to help your credit score, neither should you avoid credit cards just because you think it will.
In fact, FICO reports that “Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.”
5. Don’t Shop for Loans for More than 30 Days
One of the paradoxes of credit scoring is that consumers are penalized for having too many recent inquiries on their report, yet when shopping for a home, auto, or student loan, borrowers are wise to get quotes from several companies.
And if each of these lenders check your credit score, it would seem to hurt you to shop around. Thankfully, it doesn’t. According to FICO, “For these types of loans, the FICO score ignores inquiries made in the 30 days prior to scoring.”
So feel free to leave no stone unturned in your quest to find the lowest rate loans, just watch the calendar and don’t take too long.
It would be nice if we all knew the FICO formula and could accurately anticipate the way our credit scores are affected by our actions. But unfortunately, the FICO seems to believe that having this knowledge would be akin to cheating.
Although, by understanding just the factors that FICO chooses to disclose, you can improve your credit score in ways that you may never have thought of.