How to Build and Improve Your Credit Score

10/26/2023 - By Pierce Broscious

While most individuals understand the importance of good credit and having a high credit score, they are often unsure of how this is measured. The difference between a good and bad score could potentially equate to thousands of dollars in interest savings over the long term. Let’s take a closer look at credit and discuss some ways to improve your credit score.

First, what is a credit score? The Consumer Financial Protection Bureau defines a credit score as a prediction of an individual’s credit behavior, such as how likely they are to pay a loan back in time. Scores are determined based on information from their credit report, using a universally adopted calculation method, such as FICO. The result is a three-digit number ranging between 500 and 850. According to Experian, a good score is within the range of 670 – 739. For bonus points, a range of 740-799 is considered very good, and 800 and above is considered excellent. If your score is below this range, or if you don’t have a score at all, don’t worry – here are a few ways you can build and improve your credit.

#1: Use a Credit Card… Wisely!

Using a credit card isn’t a bad thing. Credit cards are a great way to consistently prove your ability to make regular payments on debt, especially for those starting to build credit. Applying for a credit card is usually quick and easy, and companies often make generous approvals. However, with great power comes great responsibility (shoutout to “Uncle Ben” of Spiderman). Before using a credit card, build a budget to determine how much you can charge and pay off in full each month. The best way to build credit and avoid paying any interest is to pay off your statement balance in full by the due date each month. This amount can be found on the first page of your most recent monthly statement. It’s important to note the statement balance is different from your current balance, which includes charges in your current statement period. If you can’t pay off your statement balance, pay attention to Tip #2 below.

#2: Debt Responsibly

This is crucial. In calculating a credit score, the credit bureaus (Experian, Equifax, and TransUnion) will look at an individual’s credit utilization ratio – which compares the amount of debt they owe with their credit limit. The higher this ratio becomes, the more negative the impact is on their credit score. For example, let’s say an individual has a $1,000 credit limit on their card, and charges $800 each billing cycle. This means they have an 80% utilization ratio. A couple of ways to improve your utilization ratio (lower it) are to ask the credit card company for a higher credit limit or to pay the amounts due in full and on time. Even if you can’t pay a balance off in full, continue making payments above the minimum required monthly payment to decrease the debt and free up more credit. To take it a step further, avoid using your card during this period until you’ve reached a point where you can pay the balance off in full.

#3: Avoid Moving Backward

While it’s important to take steps forward on credit, it’s also important to avoid taking steps backward. One example involves using most, or all of a credit line, and only making minimum monthly repayments on it. Not only does this create an unfavorable credit utilization ratio, but it also incurs high credit card interest payments, which can make it difficult to pay down the principal. It is important to pay more than the minimum to make progress on the debt and improve a credit score. Another common step backward comes from the side effects of applying for several different loans or credit cards within a short period of time, to find the best rate available. Each credit inquiry made by a lender while the borrower is “rate shopping” results in a small decrease in their credit score. To clarify, rate shopping does not always hurt one’s credit, and when done effectively, it can help individuals save money on interest. The best way to prevent duplicating a mark against one’s credit score is to submit all applications within the same 14-day period. Read more here from Experian about the details.

Set a Goal and Be Consistent

It can be tempting for individuals to expect immediate results after taking steps to improve their credit score. The reality is that it takes time for scores to change and debt to be repaid. The best way to ensure your score keeps moving in the right direction is to set realistic goals, be consistent in your steps to get there and minimize setbacks.

Questions?

If you’d like to speak to an advisor about how to balance debt repayment with investing for the long term, contact us.

About the Author | Pierce Broscious, CFP®

Pierce is an associate financial advisor and Certified Financial Planner™ practitioner for Saltmarsh Financial Advisors, LLC, an affiliate of Saltmarsh, Cleaveland & Gund. Pierce works with clients to develop comprehensive financial plans, conduct in-depth portfolio analysis, and provides investment recommendations tailored to clients’ unique risk tolerances and needs. His areas of expertise include investment and retirement planning, and he proudly partners with Saltmarsh’s CPA tax advisors for coordinated estate and tax planning.

Pierce joined Saltmarsh in 2018 after graduating from the University of Georgia with a BBA in Finance. He is an active contributor to the firm’s financial education initiatives through blog posts and webinars and is an emerging leader in Saltmarsh’s firm-wide Growth & Development efforts, having received recognition for his contributions.

Pierce is a native of Pensacola, FL, where he pursues his passion for offshore fishing and boating.