Maintaining a top notch credit score is essential for all consumers, even ones who do not foresee any immediate needs to obtain a loan.
Emergencies such as a broken air conditioner or a failed car battery often crop up when consumers least expect them. A high credit score can mitigate some of the pain of having to shell out hundreds or even thousands of dollars because the interest rate offered will be lower.
Lenders offer consumers with above average credit scores the best interest rates, sometimes as low as 0%.
A high credit score is the key for borrowers to ensure lower rates, which can save consumers thousands of dollars over the term of the debt. Here's a quick rundown of what the numbers mean - a score of anything below 620 ranks as poor, 620 to 699 is fair, 700 to 749 is good and anything over 750 is excellent.
Consumers who retain higher credit scores have an "advantage when it comes to saving the most on interest rates and other mortgage fees," said Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, D.C-based non-profit organization.
Here are 12 tips to increasing your credit score:
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Report these errors, which could potentially cause damage to your credit score, immediately since mistakes can several weeks or months to clear up, McClary said.
Making timely payments has a large impact on your credit score, said Jim Triggs, a senior vice president of counseling and support of Money Management International, a Sugar Land, Texas-based non-profit debt counseling organization. Once you catch your error, try to pay the bill as quickly as you can.
Pay down credit card balances routinely and leave as much available credit remaining as possible, he said. Even if you pay your the entire balance each month, charging close to the limit is not a good idea.
"How much of your available credit that you utilize has a big impact on your score," Triggs said.
Once you have paid off the balance on these accounts, avoid closing them, especially if you have had them open for a long duration of time, he said. This lowers your credit utilization ratio or brings the amount of your available credit closer to the amount of debt you owe.
"The length of time accounts are open impact your score," Triggs said.
While it is tempting to take advantage of the generous discounts being offered by the issuer, especially during the holidays when retailers ramp up their offers, avoid opening more than what is necessary.
"Numerous inquires on you credit report could decrease your credit score," he said.
Consumers should aim to get and keep their ratio of debt to available credit below 10%, said Greg McBride, chief financial analyst for Bankrate, a New York-based financial data and content company. For consumers who are saddled with student loans or other debt, this principle is even more critical.
Borrowers who are in the loan approval process for a mortgage or car loan and have "gotten incorrect items fixed on their credit report or made a large payment against a revolving line of credit, should ask the lender for a 'rapid re-score' that takes those actions into account," he said.
Since 65% of a consumer's credit score is based on their track record of making payments and how much debt they are maintaining, paying more than the minimum amount each month is important, said McClary. Paying on the minimum means a consumer will eventually pay more in interest than the amount of the original debt accrued.
Utilizing a debit card to pay bills may help consumers who are attempting to stick to a tight budget, but only using them means they are "credit invisible," said Jeff Golding, chief growth officer at IRH Capital, a Northbrook, Ill.-based financial company, and former CEO of WilliamPaid, a Chicago company that allowed people to build credit through paying their rent online.
Consumers who refrain from obtaining a credit card means they also fail to have a credit score since credit bureaus cannot see a history of the consumer paying their debt on time.
Whether you are trying to pay down your debt or using a credit card to build your credit score, use them conservatively. Credit bureaus do not examine how often a credit card is used each month, only if the debt is paid on time and does not exceed the credit limit, Golding said.
If you are planning on buying a house in the next few months, avoid obtaining a car loan or buying appliances and accruing more debt, he said. The additional debt can lower your credit score and impact the interest rate you receive for your mortgage
If you decide to co-sign for someone, be very careful, as negative account history from them will affect your credit as well, said Golding.
"Make sure this person is someone you can trust to manage their debt properly," he said.