March is National Credit Education Month in the U.S., which makes it the perfect opportunity to brush up on your credit basics.1 Whether you're a credit novice or well-versed in the art of the FICO score, below are four ways to potentially boost your credit IQ.
Dissect Your Credit Score
Do you know what goes into your credit score? Although the exact weight given to each factor is proprietary, the credit reporting bureaus look at the following:
- Late payments and accounts in collections. If you don't have a solid history of on-time payments, or if you have accounts that have been sent to a collection agency, your score is likely to suffer. The same goes for derogatory marks like bankruptcy filings, evictions, and mortgage foreclosures.
- Credit utilization. Credit reporting agencies like to see a credit utilization rate of 30 percent or less typically.2 This means that if you have a total credit limit of $30,000 spread across multiple cards, your total balance on all cards shouldn't be more than $10,000.
- Age of credit history. The older your credit history, the better—and each new credit account you open may lower the average age of your credit history. If you want to close credit accounts, try to focus on the newer ones rather than the older ones, as this may extend your credit history and avoid compromising your score.
- Number and type of accounts. The credit reporting bureaus like to see a healthy mix of credit, with a moderate number of accounts that include both revolving accounts like credit cards and fixed accounts like mortgages and auto loans.
- Number of hard inquiries on your credit report. Applying for new credit more than a few times a year may increase the number of inquiries on your credit report, reducing your credit score. Although this factor isn't as heavily weighed as the others, it's a good reason to avoid having your credit run unless you're serious about taking out a loan.
Check and Clean Up Your Credit Report
You're entitled to a free copy of your annual credit report once per year. Take advantage of this opportunity to carefully review your credit report and contact the reporting bureaus to correct any misinformation. Ideally, there are no surprises on your credit report, but you may discover an account that slipped through the cracks and gone unpaid or a new line of credit you haven't applied for.
Consider Refinancing High-Interest Debt
One way to improve your credit is by reducing your credit utilization rate—and one way to do this is by refinancing your high-interest debt so that more of each payment goes toward principal paydown. The more quickly you pay down your debt, the more quickly your credit score may reflect this progress.
Schedule an Appointment With a Financial Professional
Whether you need a bit more guidance when it comes to money decisions or just want to make sure you're on the right track for the future, a financial professional may advise you on a wide range of credit- and finance-related issues. This Credit Education Month, consider making an appointment with a financial professional to take the temperature of your savings and investments.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess
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1 https://nationaldaycalendar.com/national-credit-education-month-march/ 2 https://www.experian.com/blogs/ask-experian/credit-education/score-basics/credit-utilization-rate/