Improving Credit

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Tactics to Improve Credit Ratings

Several tactics that can assist the average American in building better credit are regularly checking their credit scores, keeping accounts active, establishing at least three accounts, paying off debt and paying on time.

Regularly Check Credit

  • One of the most widely discussed tactics among industry experts (e.g., CNN, USA Today, Experian, Business Insider) for average Americans to build better credit is to regularly check their credit scores.
  • CNN suggests that Americans check their scores at least once per year for free through providers such as TransUnion, Equifax and Experian, while USA Today encourages adults to review their credit scores on a more regular basis through CreditKarma and CreditSesame, both of which also provide free monthly reporting.
  • Generally speaking, Business Insider notes that this step can help Americans identify and address any inaccuracies in their credit reporting.
  • This is particularly relevant for Baby Boomers and other seniors in the US, according to CreditCards.com and The Points Guy, given that "elderly people are particularly vulnerable" to identity theft and other forms of fraud that can impact their credit scores.
  • Notably, the FBI and American Bankers Association are among the experts who note that Baby Boomers are currently the top demographic target in the US for fraud, and report losing $2.9 billion annually.
  • However, this step can also be relevant for Millennials and other younger generations in the US, according to Consumer Reports and Experian, given that reviewing one's credit report can be instrumental in understanding what impacts credit and how to improve it in the future.
  • According to the Consumer Federation of America and VantageScore Solutions, American Millennials currently show the "lowest level" of knowledge about credit, with only 56% percent scoring in the good or excellent range.
  • Meanwhile, regularly checking credit reports has the potential to almost immediately result in improvements to credit, given that doing so can quickly highlight potential errors as well as credit issues that can quickly and easily be addressed.

Keep Accounts Active

  • Industry experts including CNBC, Bankrate and TheStreet also widely suggest that average Americans keep their existing credit accounts active in order to build better credit.
  • According to Bankrate, keeping older accounts open and active helps improve credit scores because "scoring algorithms look favorably" upon both older accounts as well as the level of available credit.
  • CreditCards.com adds that keeping accounts open and active directly impacts credit history, which represents 15% of the credit score calculation, and that maintaining these accounts can therefore immediately improve credit scores.
  • Not only is this strategy relevant for all Americans, but it appears that it could yield value for a meaningful percentage of the population.
  • Specifically, a 2019 survey revealed that more than half (58%) of Americans are unaware of the fact that closing credit cards can hurt credit scores, and a higher 61% have actually closed such an account.
  • Meanwhile, keeping older accounts active is a particularly relevant strategy for Baby Boomers and other seniors in the US, according to CreditCards.com and The Points Guy, given that closing any one of their relatively older accounts can significantly and more dramatically impact their "average age of accounts."

Establish at Least Three Accounts

  • Experian, Credit.com and CNBC are among the credible resources that also highlight the potential for Americans to improve their credit by opening and maintaining at least three credit accounts.
  • According to Ethan Dornhelm, the vice president of FICO Scores and predictive analysis, those Americans with the highest credit scores have an average of three open cards.
  • CNBC adds that opening and maintaining new accounts helps Americans build credit by increasing their available credit, which can thereby immediately improve their "safe utilization ratio" and overall credit score.
  • Specifically, adding accounts can help reduce the relative spending of an individual compared with their credit limit (aka safe utilization ratio), which should ideally be at or below 30%.
  • Per Consumer Reports, this tactic is particularly relevant for Millennials and other younger adults who may have limited accounts and therefore a low available credit level.
  • In particular, Consumer Reports recommends that younger generations of Americans consider becoming an authorized user on their parent's credit cards, signing up for a starter card or considering a secured card.
  • However, Business Insider and Mr. Dornhelm caution against being too aggressive in opening new accounts, given that new credit cards also provide new opportunities for credit missteps.

Pay Off Debt

  • A more universally recommended if somewhat nuanced strategy for Americans of all ages to build better credit is to pay off debt, according to Credit.com, The Motley Fool and CNBC.
  • Both industry experts advising older Americans (e.g., CreditCards.com, The Points Guy) as well as those guiding younger Americans (e.g., Consumer Reports, Experian) consistently highlight the importance of paying off debt to improve credit.
  • This is because paying off debt can help maintain or reduce an individual's utilization ratio to at or below 30%.
  • As such, lowering debt balances on revolving lines of credit (such as credit cards) to achieve this target ratio can have a near-immediate impact on credit scores.
  • However, Credit.com also highlights the fact that Americans should be careful about paying off non-credit card debt too early, given that it can make an individual appear to be "less credit-worthy."
  • Additionally, Credit.com cautions that the early repayment of installment loans (e.g., mortgages, student loans) won't help build credit.

Pay On Time

  • Another universally recommended strategy for Americans of all ages to build better credit is to pay their bills on time, according to CNBC, Credit.com and CreditSesame.
  • Once again, industry experts advising older Americans (e.g., CreditCards.com, The Points Guy) as well as those guiding younger Americans (e.g., Consumer Reports, Experian) emphasize that paying on time is the "best way to improve your credit score."
  • According to FICO, making payments on time is the "single largest factor" in calculating credit scores, given that payment history comprises 35% of an American's credit score.
  • Financial planner Rob Oliver adds that missing a payment is "much worse" for credit scores than failing to pay off an entire credit card balance.
  • Meanwhile, the time it takes to see a result may vary by situation, given that it could take only a month or two to recover from one missed payment, while a series of late payments will impact credit for a much longer time period, even with more consistent, subsequent payment practices.
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