It’s summer, and now hardly feels like the time to “work” on anything. But some things — like boosting your credit score — can be worth some extra motivation. And if you’re looking to finance a large purchase after Labor Day, now’s the time to work on your score.
1. Know Your Weaknesses
First step: If your score is not where you want it to be, make sure you understand why. The biggest factor in scoring is on-time payments, which accounts for about 35% of your score. So if late payments have been a problem, your first move should be to make sure you pay on time going forward. Automated payments are one way to do this. If the idea scares you because you are afraid that an unusually expensive purchase could leave you without enough funds in your bank account, consider automating what is normally your minimum payment (or slightly higher, to accommodate an occasionally large purchase). That way, you avoid paying late and safeguard your score. A single late payment can cause your scores to drop significantly, so paying on time should be a priority.
2. Pay Down Debt
Second priority should be whittling away at those high credit card balances. Ideally, you want to avoid having a balance that is more than 20%-25% or so of your credit limit, and those with the best credit scores use less then 10% of their limits. If you are using 50% of the limit of one card, and 5% of two others, consider trying to reduce the balance with the high “debt usage” ratio (the one at 50% of the limit) first. (Other ways to get lower credit utilization is to ask your card issuer for a higher credit limit or to apply for an additional card. But you should be aware that applying for new credit can cause a small, temporary dip in your score.)
The good news about reducing balances is that you won’t have to wait long to see improvement in your scores. While the effect of late payments can linger for years, once you’ve gotten rid of a high balance, the fact that it was up there in the past shouldn’t hurt you since credit scores are calculated based on the information in your credit reports at the time the score is requested. You have two or perhaps three billing cycles before Labor Day. If your balances are typically higher than 30% of your credit limit, focus on moving the needle to below 30%. If you’re already there, shoot for less than 10%.
3. Don’t Rush to Apply for New Credit
Your credit age also figures into your score, so be cautious about opening new credit, which can reduce the average age of all your accounts. Account mix (whether you have more than one kind of credit — i.e. credit cards and a car loan) and account inquiries (as when you apply for credit) also count, but each factor affects only about 10% of your score, so your efforts are best focused on making sure you’re paying on time and that you are keeping your balances low.
Monitor your progress carefully. There are thousands of scores, and monitoring the same score month to month is the way to see how you’re doing.