Deciphering the factors that contribute to a credit score and the ways to improve that magic financial number might seem intimidating, but achieving the great credit score of your dreams is a somewhat simple matter of discipline and attention.

Whether your score is poor or on the verge of great, you know you want to improve it because you've already checked it. Understanding what constitutes your score means more than knowing the number, though. There are three major bureaus that report your credit: Equifax (yes, that Equifax), Experian and TransUnion. It's smart to check all three reports annually for errors or inaccurate information.

A credit score is based on payment history, credit utilization, length of history, credit mix and the amount of inquiries on your accounts.

Some of these factors are worth more than others and the two highest-weighted factors are your payment history and credit utilization. To optimize your score, you'll need to manage all of these factors carefully. Here are the best tips to improve your credit score.


Pay all bills in full and on time

This includes credit cards, utilities, rent and loan payments. Any balance that carries over to the next month or any late penalties incurred will hurt your score and quickly undo the work you've begun. Paying off debt contributes 30% to a FICO Score while your payment history contributes 35%. If you've let a payment go by accidentally, you can ask for the company to forgive the mistake, convince them not to report it to the credit agencies, or, at least, ask them to waive any late fees. A person with a history of on-time payments will have more bargaining power to try to earn this forgiveness but it's always worth a shot.

To avoid late payments, see if the credit or utility company offers payment reminders and turn them on if they do. And, for an extra level of protection, set up automatic payments from a checking or savings account. Be sure that the company will pull the full balance that's due and not just the minimum payment amount. Late payments will remain on your reports for years but older mistakes count for less and less toward your score as they age. Every positive step builds good credit and, simultaneously, reduces the effects of the older, bad credit. The faster you take charge of your future credit, the faster you'll earn forgiveness for the past.

Credit utilization

Credit utilization is the amount of your credit limit you spend each month. If a credit card offers a $3,000 limit and you spend half of it in one month, then your credit utilization for that month is 50%. The magic number according to most experts is 30%; keeping your usage under 30% (optimally, around 10%) will raise your score more quickly, as it evidences responsible borrowing.

The most obvious way to lower your utilization is to reduce overall spending but this might not be immediately possible. Paying off some of your balance before it's due will show the credit company a lower utilization when they close the statement. Opening another line of credit can increase your credit limit but do not open several lines in a short amount of time. This will sound like a warning alarm to the reporting agencies.

It's worth mentioning that closing old credit cards might not actually benefit you, though it sounds like the logical thing to do if you've stopped using a card. Some reports take into account the age of your oldest open account, and closing those unused cards might shorten your credit history and negatively affect your score.

Hard inquiries

Any time a company requests access to your credit report—such as for a car loan or mortgage—it is called a hard inquiry. Whether or not you are approved by the company, the hard inquiry affects your credit score. Several hard inquiries in rapid succession will negatively impact your credit. However, checking your own score has no effect.

Recovering from bad credit

All of the above steps are important long-term choices for healthy credit. But you might be trying to recover quickly from a major financial loss, like a foreclosure, short sale or bankruptcy, which could drop your score by up to 150 points. Unfortunately, these long-term methods are still the best ways to heal even the worst credit. One slightly more immediate action is to apply for a secured credit card. With a cash deposit—often $200—some banks will offer an equal or greater line of credit with which you can begin, carefully, to grow that magic number.

The keys in every case are discipline, diligence and patience. Improvement will happen gradually but it will happen. The more care you put into your financial decisions, the more quickly you'll boost and secure your credit health.

Tom Twardzik is a writer covering personal finance, productivity and investing for Paypath. He also contributes pop culture reviews for Popdust and travel writing for The Journiest. Read more on his website and follow him on Twitter.



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The Federal Reserve sets the guardrails for the federal funds rate, and through that helps control the money supply for the nation.

When you take out a loan for a car, charge something to your credit card, or get a personal line of credit, there is going to be an interest rate that applies to your loan.

A lot of different factors go into what you will be charged, including your own personal credit score. But even those with flawless credit still see a minimum charge that they can't get around. That all goes back to the Federal Funds Rate.

One thing consumers rarely realize is that all of our banks are lending money to each other every night. Banks are legally required to maintain a certain percentage of their deposits in non-interest-bearing accounts at the Federal Reserve to ensure they have enough money to cover any withdrawals that may unexpectedly come up. However, deposits can fluctuate and it's very common for some banks to exceed the requirement on certain days while some fall short. In cases like this, banks actually lend each other money to ensure they meet the minimum balance. It's a bit hard to imagine these multibillion-dollar financial institutions needing to borrow money to tide them over for a bit, but it happens every single night at the Federal Reserve. It's also a nice deal for those with balances above the reserve balance requirement to earn a bit of money with cash that would normally just be sitting there.

The Federal Reserve The Federal Reserve


The exact interest rate the banks will charge each other is a matter of negotiation between them, but the Federal Open Market Committee (FOMC) (the arm of the Federal Reserve that sets monetary policy) meets eight times a year to set a target rate. They evaluate a multitude of economic indicators including unemployment, inflation, and consumer confidence to decide the best rate to keep the country in business. The weighted average of all interest rates across these interbank loans is the effective federal funds rate.

This rate has a huge impact on the economy overall as well as your personal finances. The federal funds rate is essentially the cheapest money available to a bank and that feeds into all of the other loans they make. Banks will add a slight upcharge to the rate set by the Fed to determine what is the lowest interest that they will announce for their most creditworthy customers, also known as the prime rate. If you have a variable interest rate loan (very common with credit cards and some student loans), it's likely that the interest rate you pay is a set percentage on top of that prime rate that your lender is paying. That's why in times of low interest rates (it was set at 0% during the Great Recession), a lot of borrowers should go for fixed interest rate loans that won't increase. However, if the federal funds rate was relatively high (it went up to 20% in the early 1980's), a variable interest rate loan may be a better decision as you would be charged less interest should the rate drop without the need to refinance.

The federal funds rate also has a major impact on your investment portfolio. The stock market reacts very strongly to any changes in interest rates from the Federal Reserve, as a lower rate makes it cheaper for companies to borrow and reinvest while a higher rate may restrict capital and slow short-term growth. If you have a significant portion of your investments in equities, a small change in the federal funds rate can have a large impact on your net worth.

Getty Images/Maria Stavreva

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