Most of the time, tips you find for improving your credit center around checking your credit score and following some basic tips for improving it. Those strategies are mostly based on tips given out by the three major credit bureaus (who maintain the credit reports upon which those scores are calculated) and the Fair Isaac Corporation (who actually handles the formula for calculating the most common score, the FICO score).
There are a few catches, though. First, lenders are now using a more diverse set of credit scores than just FICO, and people often can’t see those scores at all. Second, identity theft is a fairly common thing and it can cause strange effects with credit scores, sometimes really adversely affecting your score and sometimes not at all. Third, manual underwriting is becoming more common, meaning that lenders are more likely to not worry about scores at all and just look at your financial situation and actual credit report directly.
What do those three things mean? The advice that’s meant solely to bump up your “credit score” might not end up having the affect you want. Most of the time, those tips will help, but they may or may not have any effect on the things you care about, like improving your likelihood of receiving loans or background checks (for jobs or apartment leases).
Given this, a much better approach is to step back and ask what exactly lenders and other people are hoping to learn from looking at your credit. What do they want to know?
They want to know that you’ll pay bills reliably. They want to know that you live up to your obligations. They want to know that, if they lend you money, they can expect with a high likelihood that you’ll pay them back. That’s the case you want to make to lenders and to others who might want to check your credit history, and information related to those things are what people are trying to extract.
So, rather than focusing on trying to maximize one credit score which lenders and others often don’t look at at all, you’re better off adopting tactics that will simply create a better credit history for you, keeping bad items and incorrect items far away.
Here are six simple things you can do to constantly improve and maintain good credit in a world of changing practices.
Pay your bills on time. Period. That is the single most effective thing you can do to keep a good credit history. Pay your bills by their due date, each and every time; if you can’t, do everything you can to never be more than 30 days late on anything, because that’s typically the threshold for a negative entry in your credit report.
If you find that you’re struggling with your bills, be proactive. Call the people you owe money to and see if you can work out something with them. Both of you are better off if you can work out a reasonable arrangement, as compared to you being unable to pay and them being unable to collect.
This may require you to change some of your personal finance habits, but if you want to have good credit, this is paramount.
Try to carry as little credit card balance from month to month as you can. This doesn’t mean “don’t use your credit card,” but what it does mean is that you shouldn’t be carrying much of a balance from month to month and you shouldn’t be approaching the credit limit on your cards.
Aim to minimize the balance you carry from month to month. During the month, try to avoid bumping up against your credit limit – ideally, you shouldn’t get anywhere close to it.
There are some rough guidelines out there as to what percentage of credit utilization is good to slightly raise a particular credit score – don’t worry about that. You’ll almost always be better off by aiming to get your credit cards paid down to the point where you’re not carrying a balance from month to month and a typical month of spending doesn’t take you anywhere close to your credit limit on any card.
At the same time, if you intend to borrow money or get a lease in the near future, maintain at least some line of credit. There is a wide variety of views on how many credit cards and other lines of credit a person should have open. Some people avoid it entirely, which ensures that they stay out of debt. Others go so far as to “churn,” opening up lots of lines of credit in order to get signup bonuses and other benefits.
Unless you don’t anticipate getting a loan, applying for a job, or signing a lease in the near future, you should aim for a middle ground. You want to maintain some open credit and use it responsibly, as discussed above. Don’t open tons of lines of credit, and don’t close anything, either. Rather, you want to appear like someone who uses a credit line responsibly, which you can’t show if you don’t have any or if you’re churning lots of them.
Which ones should you keep?
Keep your oldest credit card and the one you use most frequently open, and close the rest gradually over time. The oldest one you have is often the piece that establishes the length of your credit history, especially if you’re young. If that oldest card is the only one that you’ve had for seven years or longer, you should definitely hold onto it.
You should also winnow your credit use down to a single “main” card that you use, ideally one that offers a good bonus program that gives you some kind of reward for using it.
The other cards? Cancel them, but not all at once unless you’re sure no one will be looking at your credit for the next several months. Instead, winnow them down over time by closing ones you rarely use and centering your use over time onto a single card.
Be smart with your identity and your credit cards. Basically, don’t give out any personally identifying information unless you’re very sure of the situation. Don’t ever enter banking or credit card information over public wi-fi. Don’t click on links in your emails; rather, if you need to check on something, go to the website or app directly and log in. Don’t give your credit card number directly to any service that doesn’t have a very long reputation of being secure (Amazon is okay, but BigBadBillsOnlineBazaar.com probably isn’t).
If you do just those things, you’re cutting off most of the “low hanging fruit” of identity theft that you can control. A lot of identity theft happens because of those kinds of simple missteps, which can leave your information exposed to anyone who might want that data.
Of course, what you can’t control is the other end of the equation: banks and retailers and other large institutions who don’t properly secure their data, allowing hackers and other bad actors to access that information and do any number of things with it. What can you do against that?
Regularly check your credit reports, bank statements, and credit card statements for correctness and accuracy. When your bank statements or credit card statements come in every month, take a few minutes to run through them and make sure all of the charges are accurate. If you find something inaccurate, contact the bank or card issuer and figure out what’s going on.
Every year, check your credit report by using the FTC’s portal at annualcreditreport.com. The federal government mandates that each citizen can request a copy of their credit report from each credit bureau for free each year. Just download it, run through it, make sure everything is accurate, and contact them to report any inaccuracies.
Those two steps will go a long way to make sure that the credit data that’s shared about you is as accurate as possible and free of any misleading statements that could negatively impact your credit.
In the end, if you behave like a responsible person who keeps up with your bills, uses credit extended to you responsibly, and keeps an eye on your bills and credit report, you’ll be fine, no matter what credit scoring system a company uses or whether they manually examine your credit report. Don’t worry about “gaming” a particular credit score, as there’s a very good chance that lenders and employers won’t ever even look at it. Instead, behave in a way that results in good scores all around and a good credit report.