According to Experian’s 2013 State of Credit report, the average credit score in the United States is 681, and for many, carrying a large credit card balance, making late payments and other factors that can lower scores are a way of life. But that doesn’t mean obtaining the elusive score of 850 is impossible. It’s becoming easier to get an above-average credit score. Here are five guidelines to follow on your quest to credit score perfection:
1. Monitor your credit history. Before you start trying to increase your credit score, it’s important to learn more about your credit history and the various accounts that affect it. Regularly examine your credit report for mistakes. Incorrect credit limits, late payments or collection items can affect your overall score. If your report is wrong in any way, you should immediately contact the credit bureaus, which are required by law to respond with findings within 30 to 45 days. If the credit bureau cannot provide evidence of a debt incurred, it is lawfully required to remove it from your credit report.
2. Pay down debt. It’s always good to tackle credit card debt first. Paying off student loans or mortgages can help raise your score, but getting rid of credit card debt will have the biggest positive impact. Getting your balances below 10 to 30 percent of the credit limit on each card should improve your score. Prioritize paying down the cards that are closest to their limits instead of paying off the cards with the highest interest rates.
3. Sign up for a secured credit card. For people with poor credit, a secured credit card can be an excellent tool for rebuilding a credit score. When you sign up for a secured credit card, you are required to put down collateral cash, which in turn becomes your credit limit. For example, if you put down $500 on the secured card, $500 is the maximum amount you can spend for the month. You can then use the secured credit card as you would a regular card, by making purchases and paying off the balance each month. This is a great way to show that you’re responsible with credit and can maintain a positive payment history.
4. Avoid canceling any credit cards. Cutting up your credit card and closing the account may seem like a way to celebrate after making your last payment, but doing so won't help you. Believe it or not, canceling credit cards actually will lower your credit score. Even if you don’t use a credit card, keeping older accounts open and paid in full shows lenders that you have a long track record of good credit behavior. In addition, closed accounts will still show up on your credit report and can be factored into your score. It's especially important to keep this in mind if you’re applying for a mortgage, car loan or large line of credit in the future.
5. Pay bills on time. Late payments have the biggest negative impact on your credit score, so keeping your finances current is the best way to get closer to that coveted 850. Use personal finance tools to see where your money is going and to alert you when bills are due. Consider setting up automatic bill paying through your checking account to ensure your payments are on time.
Building up a good score from a low point will take time and discipline. Keep working at it, as a high credit score is essential when planning your financial future.
Prabhakar is a consumer spending and retail analyst and mint.com spokeswoman, a leading Web and mobile money
management tool that helps people understand and do more with their money.