You should never date anyone with a credit score below 650. But what if that person is you?
There are two schools of thought on the topic:
If you plan to pay back your debts and go off the grid, you don't need to worry about your credit score.
But if you plan to take out a loan in the future, then you have to watch your credit score tick for tick.
I am kind of in the middle on this. I want to buy a Corvette and I've already planned for this purchase. But I might take out a loan, if the terms are attractive enough.
Generally, I don't think about my credit score. And if you have at least a 740—which is a prime score—you should probably care about your credit score less than you think.
If you do need to up your credit score game, here are four things you can do… and three you shouldn't.
When lenders review your credit report, they're interested in how reliably you pay your bills. That goes for all your bills—car payments, mortgage, utilities—not just credit cards.
If you're behind on any payments, bring them current as soon as possible. Late or missed payments appear as negative information on your credit report for seven years.
This is the No. 1 factor that goes into determining your credit score. If you miss one payment, your score goes down 70 to 100 points.
You can set up automatic payments and/or calendar reminders to make sure you pay on time every month.
If you are making your utility, cell phone, and even Netflix (NFLX) payments on time, you can get a one-time credit score boost from one of the major credit agencies. Experian Boost is an opt-in program that connects to your bank account to identify your payment history.
Your FICO score gets updated in real time right away… at Experian. But there are two other agencies—TransUnion and Equifax—and you don't know which one a potential lender is going to tap for your credit report.
In other words, this could work for or against you. So be careful.
Your reliability in making payments is only part of your financial story. Lenders also want to know how responsible you are with credit. So…
Another important number in credit score calculations is your debt utilization ratio.
To figure out your ratio, look at all your credit card statements from the last 12 months. Add the statement balance for each month and divide that amount by 12.
That's how much credit on average you use each month. So if you spend $3,000 a month and have $10,000 in available credit, that's a 30% utilization ratio.
Lenders like to see ratios of 30% or less. This tells them you likely know how to manage credit well.
Unnecessary credit can harm your score in several ways. It will create too many inquiries, for starters. Hard inquiries remain in your credit report for two years.
Worse, it will possibly tempt you into overspending and accumulating new debt.
However…
You want to be debt-free. But closing an account may increase your debt utilization ratio.
In other words, owing the same amount of money—but having fewer open accounts—may lower your credit score. Remember, you want to keep that ratio low. (Preferably under 30%.)
Plus, the longer the account is open, the better it is for your score.
You don't have to think about your score every day. But it's a good idea to monitor your credit on a regular basis. If you see errors, dispute them right away.
Your goal is to master your debt so you don't have to worry about this stuff.
It's not a bad way to live.
Jared Dillian