How to Boost Your Credit Score at Every Age
Monday, May 2, 2011
Your age often influences how you balance your budget, save for retirement and evaluate your investments. But it should also be a factor in managing your credit score.
The duration of your credit history heavily affects your FICO score, which lenders use to gauge a borrower’s ability to repay a loan. While it’s important to pay your bills on time and keep your balances low at every age, there’s more that most consumers can do to boost their scores so they can get the best loan terms.
Here are nine steps that will help you build excellent credit over your lifetime.
1. Apply for a credit card
John Ulzheimer, president of consumer education for SmartCredit.com, says consumers typically enter the credit game between the ages of 18 and 22, though the CARD Act’s restrictions are making increasingly difficult for people under 21 to get their first credit cards. Regulations aside, it’s better to get a credit card sooner rather than later because debit cards won’t boost your credit score.
Most credit newbies get their first credit card by getting a parent or guardian to co-sign their application or by applying for a secured card, which requires customers to put down money upfront that will match their line of credit and minimize default risks. Either strategy can be effective as long as you understand that the real trick is using these cards responsibly.
2. Don’t apply for every credit card
“Building credit isn’t the same as building a large balance,” Ken Lin, CEO of Credit Karma.com, says. Don’t make the mistake many credit beginners make by opening a store credit card at every retailer visited during Christmastime, for example.
Tom Quinn, consumer credit expert for Credit.com, says consumers should only apply for credit when they need it. A large number of credit inquiries over a very short period of time can cause your score to go down, he says. It also can make it a whole lot easier to run a bunch of bills you can’t possibly pay.
In lieu of a wallet full of credit cards, Lin suggests adding a new credit card once a year to your arsenal until you’ve amassed three or four cards that you can consistently pay off on time.
He also suggests finding cards that don’t charge annual fees because any card you open at this stage should stay open for at least five years. These cards determine the duration of your credit history, which accounts for 15% of your total credit score, so choosing a card with a little-to-no annual fees makes it easy for beginners to keep fledging accounts open for the long haul.
3. Start watching your credit score
Credit beginners must be extremely diligent during these formative years. The FICO score attempts to predict whether you’ll pay a loan back on time and early indications that you won’t can be particularly damaging.
“Consumers in their 20s should be aware that their credit scores are more volatile and will react differently to late payments and excessive credit card debt than consumers with larger and older credit files,” Ulzheimer says.
Your 30s & 40s
1. Maintain a variety of accounts
If your 20s were all about building credit, then your 30s and 40s will be all about leveraging it.
“Now is the time to diversify accounts,” Lin says, suggesting that those who managed to build a decent credit score in their 20s should consider adding revolving credits lines, like a mortgage or auto loan.
Credit lines fall into two major categories. Installment accounts require consumers to pay a fixed amount each month until the entire balance has been depleted, while revolving accounts can be reused as long as minimum payments are made and the limit isn’t reached. Having both on the books nets more points with FICO than having only one kind.
2. Take advantage of low rates
If you’ve achieved a strong score, you will probably qualify for the lowest interest rates on large loans. Consider whether it’s time to buy property, cars or upgrades for your home.
“People don’t realize the value of a good score,” Lin says, pointing out that once you’re in the 750 range, there’s no need to shoot much higher. “It’s meant to be spent.”
3. Don’t sweat short-term score swings
Quinn says it’s alright if your score dips into the lower 700s after you purchase a home, take out an auto loan or incur debts that are typical among those starting families. As long as you’re responsible with paying back debt, your score will likely rebound from the hit you take from credit inquiries.
“Credit reports belonging to people in their 30s and 40s are well-aged and generally large enough that taking on new debts and making small payment mistakes from time to time don’t spell credit score disaster,” Ulzheimer says.
Your 50s & Beyond
1. Curb your credit use
Once you’ve reached 50, it’s time to start weaning yourself off credit cards.
“If you’re 50 or 60 years old and you’re still paying down debts, you probably don’t have a lot of savings stored away for retirement,” Lin says.
To make sure that you’re not stuck in debt during your golden years, focus on paying off existing loans and avoid taking out large loans, such as a mortgages.
“At this point in your life if you’re not at or above FICO 780 then you’ve done or are doing something wrong,” Ulzheimer says. “Consumers with decades of credit experience not only have well-aged credit reports, a basis for excellent FICO scores, but should also be responsible enough to know how to manage all types of credit obligations.”
2. Use credit cards strategically
Credit maintenance is not the same as credit abstinence. You should keep using your credit cards on small purchases because activity is a factor in setting your FICO score.
“Pay the check at a restaurant using your credit card, then pay the balance off in full,” Quinn suggests. “That way, if you do need to apply for credit in the future, your account looks active.”
Be careful when you close accounts. You don’t want to shorten your credit history and hurt your score by closing your oldest account.
3. Keep tabs on your credit score, even if you’re not applying for new accounts
Ulzheimer says people over 50 are more vulnerable to fraud because they often stop paying attention to their credit reports. That’s why people over 50 should check their scores, even if they’re not applying for new loans or incurring debt.