Among the things many 20-somethings don’t think about, including mortgage interest rates, life insurance, divorce law, what it costs to raise a child, is a frighteningly abstract concept: their credit score. The Financial Diet recently looked into everything credit score related, into the jaws of the mystical beast, and found that its inner workings are actually more easily digestible (we’re really going with this metaphor here), than most of us think. And, the best findings are that you can actually improve your credit score without too much struggle (but a whole lot of discipline, planning, and, gulp, financial responsibility).
Broken down into steps, the process isn’t that intimidating.
1. Know your score.As The Financial Diet puts it, “understand how your credit score is calculated, and what your credit score means on a scale of ‘bad’ to ‘good.'”
2. Compare your score to consumer score ranges.
3. Compare your score to the average score for your age range.Consult this other handy-dandy chart by The Financial Diet:
“Once you know what you’re looking at, you can then compare your own score to the score of your peers to see if you’re on track, behind, or ahead of the curve.” According to The Simple Dollar “a combined 24% of Americans had poor FICO scores below 600, while 22.9% were holding the middle ground between 600 and 699. Happily, more than 53% of Americans had good or excellent scores of 700 or above.” So, if you’re landing in the middle, you’re one of the 22.9%. But you ought to aim for the 53%, and chances are good that you might be there already.
4. Keep under 30% credit utilization.That means to, at least 70% of the time, live within your means. Keep a budget, pay with cash, and pay off your credit balance in full each month.
(Also, consult our guide for how to save money if you love spending money.)
5. Keep hard inquires to a minimum.That translates to avoiding having your credit checked by a lender (like when you’re buying a car, a home, or applying for a loan), unless absolutely necessary. Each hard credit check reduces your credit score a few points at a time, and tells financial institutions that you might be taking on a burden that could affect your ability to pay back other debts.
6. Inventory the number of accounts you have open.Having “multiple and varied accounts” is good for you score. You don’t need to close older accounts, but you should have a solid picture of what you’ve got and what you’re doing with them. Experts say that “15% of your credit score hinges on the length of your credit history. Once you see your credit report, it might be tempting to close those old, unused accounts, but that can actually hurt your score.”
Now that you understand your credit score and how it works, it might be time to make some changes to your habits. Get to know the status of your financial health, and, like going to the gym or stepping outside, get moving!