3. Reduce the amount you owe.
Lenders want you to borrow, but not too much. Typically, lenders start to frown when you use more than 30% of your available credit on all your credit cards. This is measured by what’s called a credit utilization ratio — the amount of credit you use divided by the total amount you have — and a low means you’re probably doing a good job of budgeting. Credit usage accounts for 30% of your FICO score.
And having too little activity can also be a problem, says Griffin, because if you need a loan, the lender will want to see that you’ve used credit wisely in the past. Even if you don’t have a credit card, you can request that utility bills or other regular bill payments be added to your credit report.
For fixed-rate loans, such as home loans or auto loans, lenders look at your debt-to-income ratio, which reflects how much of your annual income is spent paying down debt. This is the amount of your monthly repayments divided by your monthly income. Your debt-to-equity ratio doesn’t affect your credit score, but if it’s too high, you may not get many credit card offers and may find it harder to get a loan. car loan or mortgage.
If you have a card that’s maxed, or close to hitting it, pay it off aggressively. You might even consider diverting some of the money from your savings to pay off your credit card. All things being equal, paying off a credit card that charges 18% interest is roughly the same as earning 18% on an investment.
4. Don’t rush to close old accounts.
The age of your oldest account, the age of your newest account, and the average age of all your accounts make up 15% of your credit score. As long as you’re not paying an annual fee on an open account, it might be worth letting it gather dust. The longer you have credit, the better your score.
5. Don’t ask for credit too often.
Getting a new card once in a while shouldn’t affect your credit any more than taking out a car loan or mortgage. People who default on their loans tend to rack up a lot of debt before they default, so lenders keep tabs on how many times you ask. New applications represent 10% of your FICO score. (The bottom 10% is based on credit mix; lenders like to see a variety of debt types, all in good standing.)
Lenders will pull your credit report when they consider giving you a loan, and this type of investigation is called a “thorough investigation.” Serious inquiries stay on your credit report for about two years. Lenders view a cluster of difficult applications as a sign of financial difficulty.
“Informal inquiries” occur when someone looks at your credit like a background check – an employer, for example, may pull your credit report if you applied for a job. And sometimes lenders will pull your report to see if you’re a good candidate for a new credit card. Informal inquiries do not affect your credit score.