Why Your Credit Score Matters and How to Improve It

Introduction

Keeping an eye on your credit score may be more important than you think — even if you haven’t had to use it yet. After all, you’ll need good credit if you hope to take out a car loan, rent an apartment, or get a mortgage to buy your first home. Believe it or not, your credit score can also impact how much you’ll pay for auto insurance — and whether you get hired for certain jobs.

If you hope to refinance your student loans with a private lender to score a super-low interest rate, you’ll need good credit for that. Want to take out a business loan and follow your dreams as an entrepreneur? You’ll need good credit for that, too. The list of reasons to care about your credit score goes on and on, and the number of negative ways poor credit can impact your life is nearly endless, too. That’s why, like it or not, we should all take steps to keep our credit scores in tip-top shape.

Understanding Your Credit Score

To accomplish this goal, however, it helps to know exactly where your credit score comes from. How can your entire credit history be represented by a three-digit number? And what factors can influence your score now and later on? The most popular type of credit score is your FICO score, and the FICO corporation offers some pretty straightforward answers when it comes to the factors they consider. The five factors that make up your FICO score include:

• Payment history: 35%
• Amounts owed: 30%
• Length of credit history: 15%
• New credit: 10%
• Credit mix: 10%

When you break down your FICO score this way, it’s easy to see how you could use this information to your advantage. Overall, the best FICO scores go to those who learn to play by the rules with each of these factors and exhibit better credit behavior than most of their peers.

Improving Your Payment History

Based on the above percentages, you’ll see one factor that should be especially easy to stay on top of. It may take time to pay down debt to decrease the amounts you owe, but you should be able to pay your bills early or on time, right?

Your payment history is one FICO score determinant that you have absolute control over, and this means you have the potential to make a big positive impact. To polish your payment history, make the following money moves:

1. If you’re someone who is prone to forgetting about your bills or paying them late, it can help to set all your bills up so the minimum payment is made on your behalf before your payment date. You can typically do this by connecting your credit card accounts to your bank account and selecting automatic payments. While you can still pay your cards off manually each month, setting up auto payments ensures you’ll never be late if you simply forget. This strategy can be tricky if you rarely keep extra money in your bank account, however, so you may want to consider saving up a ‘buffer’ so any automatic payments made don’t cause an overdraft.
2. If you’re not interested in setting up automatic payments on your credit cards, you can also consider paying them off more than once per month — and even once per week. Not only can paying your credit card bills more than once per month help you avoid late payments, but it might also help you stay on track with your budget and spending goals. For example, if you budget $750 per month for groceries and gas, checking in on your credit card bill weekly and making payments each time can help you avoid overspending.
3. Remember that bills other than your credit card bills make up your payment history, and that your mortgage payment and car payment can also play a role. If you’re able, setting up automatic payments for these bills can help you maintain a perfect payment history and avoid a ding on your credit score.
4. If you have a credit card that earns rewards, setting up all your bills to be paid automatically with a credit card instead of by check or electronic funds transfer can boost your rewards haul each year. Just make sure to pay your balance in full each month to avoid interest charges.

Conclusion

By taking steps to improve your payment history, you can make a big positive impact on your credit score. Whether you set up automatic payments, pay your bills more frequently, or use a credit card to earn rewards, your efforts can help you maintain a good credit score and open up a world of opportunities.