'Get smart about credit': 4 ways to increase your credit score
FARGO — While 580, 720 and 835 are just numbers, when associated with credit, they carry a lot of weight.
In 2003, the American Bankers Association (ABA) Foundation — the nonprofit arm of ABA — founded "National Get Smart About Credit Day" which is celebrated on the third Thursday of October. In correlation with the organization's mission to provide financial education, the day (and even the month of October) gives bankers the opportunity to get out of the office to educate the public.
"Bankers are in a really unique position. They see firsthand in their day-to-day business what happens when a consumer comes in for a loan and they've made mistakes," says Corey Carlisle, executive director of the ABA Foundation in Washington, D.C., and a Fargo South High graduate. "They also can appreciate the customer who's being vigilant with their credit."
With the day geared toward middle and high school students as well as young adults, the ABA provides education modules focused on credit — how to manage credit wisely and understanding credit scores — student loan information, budgeting materials and a popular section on identity theft protection.
"All of those issues are linked inextricably," Carlisle says.
Hundreds of banks across the U.S. participate in the Get Smart About Credit campaign. Local banks such as Gate City, Wells Fargo and U.S. Bank have "deployed hundreds of volunteers just in the Fargo region and across North Dakota and Minnesota, getting lots of volunteers into the classroom," Carlisle says.
What is credit, really?
Carlisle describes credit as part of the right of passage into adulthood.
"Like so many responsibilities in adulthood, having good credit and sound financial fundamentals is really important to having good financial health in your life — much like you'd want to take care of your own physical health," he says.
In simple terms, "credit is your ability to obtain goods or services before payment," says Marc Diana, founder and CEO of MoneyTips.com. "If banks and credit card issuers feel confident that you will pay them back, they will happily lend you money or extend credit so you can buy lunch, an appliance, a car or even a home."
After borrowing money — and responsibly paying it back — consumers are often able to gain more credit as needed. Carlisle says it's important for teens and young adults to understand these concepts.
"We want to make sure kids have the sound fundamentals to make smart choices so they're able to confront those challenges as they get older," he says.
What does your credit score matter?
Credit scores range from 300 (poor) to 850 (excellent).
"Your credit score is a numerical rating of your credit, created using information from your credit report which monitors your credit history," Diana says.
But why does all of this matter?
A good (or high) credit score comes with the advantage of better rates on loans, credit cards with lower rates and better rewards and higher credit limits — to name a few.
"People with low credit scores may be turned down for a credit card or loan, or have to pay high rates," Diana says. "They may have to resort to high-interest payday loans to make ends meet."
How to increase your score
Several factors play into a credit score, including: credit card utilization (percentage of your limit that is used), percent of on-time payments, number of derogatory marks, average age of open credit lines (how long you've had loans or credit cards), total number of accounts and total hard credit inquiries.
With all these considered, Diana offers four tips for increasing your credit score.
Pay your bills on time
"To put it in teen terms, (a credit score) is sort of like your adult GPA," Carlisle says. "The biggest factor is just paying your bills on time."
Both late and missing bill payments have a long-lasting effect on a credit score.
"Whether using your smartphone, computer or old-fashioned calendar on the wall, set up a system that reminds you when to pay your bills," Diana says. "Regarding credit cards, you don't have to pay your bill in full each month, but you should make your minimum payments on time."
Consumers can also often ask credit card, loan and utility companies to change due dates that align with their pay schedule.
Keep credit utilization low
A credit utilization ratio is the amount of credit used out of the total available. It not only applies to each credit card account but the total of all accounts.
"If you have a $500 limit on your Visa card and a $50 balance, that's 10 percent credit utilization for that card," Diana says. "Keep your credit utilization below 30 percent and try for 20 percent, if possible."
Consumers should also avoid running balances on accounts whenever possible.
"It's wise to develop the habit of not charging more than you can afford to pay off at the end of the month," Diana says. "Even though many people think it's true, you do not need to carry a credit card balance in order to raise your credit score."
Keep old credit card accounts open
"Unless there's an overriding reason to do so (like a large annual fee), don't close out any old accounts in good standing," Diana says. "Keep them active with periodic small purchases and remember to pay the bills when they arrive. This will help lower your credit utilization, and give you some back-up credit if times get tough."
Keeping old accounts open increases your credit's age. Older, more mature credit increases the overall score.
Check your credit report
"You may find errors that are bringing your score down," Diana says. "You could discover that you're the victim of identity theft and someone has been leaving unpaid bills in your name. Or you may find an old, unpaid bill that you didn't even know had to be paid. The more you know, the better off you will be."
Carlisle says awareness is key. He recommends consumers check their report at least once a year — a free service offered by annualcreditreport.com and several other online resources.