This week I visited my bank for my annual “financial check up”. Among the many conversations with the personal banker, we somehow went down the road of discussing credit scores or beacon scores. What I quickly realised was that when I asked questions on how to improve or maintain a good credit score, the explanation became quite fuzzy. The personal banking officer was unable to tell me exactly how to maintain a good credit score because the precise formula for calculating it is a trade secret, but there are some tactics that will work to raise your score.
What is a credit score?
Quick answer: A credit score is a single number that summarizes most or all of the information in your credit report. Think of it as an “executive summary” of your credit report – all of the information boiled down to just one number.
The stronger your history of making your payments on time, keeping credit cards open for a long time, avoiding bankruptcies, and so on, the higher your credit score.
The higher your credit score is, the more trustworthy you appear to people who don’t know you personally. Your credit score also affects the interest rates on your mortgage and car loans, as well as things like your ability to get a lease or even to get a job.
How do you improve your credit score?
First, pay all your bills on time. If you’re very late on your bills, it will show up on your credit report. This includes your debts, of course, but it can also include other bills as well. Keep up to date on all of your bills.
Second, keep your oldest credit card around, even if you don’t use it. The length of your credit history is a big factor and, unless you have other debts that have been around longer than your oldest credit card, keep that old card around.
Third, don’t push your credit limits on your credit cards. One big factor in your credit score is your debt-to-credit ratio, which essentially means that the closer you are to your credit limit on your cards overall, the lower your credit score is. You’re not in bad shape if you’re carrying some credit card debt (although that’s a poor idea itself), but if you’re pushing credit limits, your credit score is suffering.