Your credit score is one of the most important indicators of your financial health, especially in the eyes of lenders who have the ability to extend you credit for some of the biggest purchases of your life — like a mortgage for a home or a loan for a car.
And while you may have several different credit scores because there are many different scoring models, the FICO score is the most important one because it gets used in 90% of lending decisions. Therefore, it’s important to make sure you’re taking steps to keep your FICO score in a healthy range, which is usually considered to be 670 and above.
The good news is, the average FICO score in the U.S. actually increased eight points to 716 in the past year, according to a recent report from FICO. This seems like a promising indicator that more Americans are improving their chances of qualifying for the best loan rates, the best credit cards and more favorable terms for their mortgages.
But, if you feel like you’ll need to take some additional steps to get your FICO score into a better place, read on for Select’s breakdown of three important steps people took to increase their score.
They made more on-time payments
Missed payments have actually decreased significantly. According to the report from FICO, as of April 2021 just 15% of Americans have had a missing payment that was more than 30 days past its due date. The year before, however, 19.6% of Americans had missed a payment.
Payment history accounts for 35% of your FICO score — and it’s actually the largest factor when calculating a score. Lenders want to make sure that you have a track record for consistently making on-time payments because it’s a clue for how likely you are to pay them back when they extend you new lines of credit. This is why missing a payment can actually lower your credit score.
Of course, sometimes missed payments happen unintentionally — especially when life happens or you’re so busy that you forget to mail a check or pay the bill online. Setting up autopay can put your mind at ease when it comes to paying your bills (read about what happens when you miss a credit card payment here).
You can schedule a fixed sum of money (or the statement balance in the case of a credit card) to be paid toward your debts on the same day each month so you never have to lift a finger to manually pay them. And some lenders may actually offer you a slightly lower interest rate on your loan if you use autopay since it decreases the likelihood that you’ll miss a payment due date.
Some apps, like Mint, also send you reminders when you have an upcoming payment that’s due. And you can even mark the bill as “paid” in the app so you never have to wonder if you actually took care of it for the month.
They decreased the amount of debt they carry
Although millions of people experienced a partial or total loss of income as a result of the pandemic, stimulus bills and enhanced unemployment benefits under the CARES Act helped people prioritize paying down debt and saving. And in some cases, people who experienced minimal or no interruption in income during the pandemic were able to save more and make higher payments toward credit cards and loans in order to pay down their debt faster. Also, just having fewer discretionary spending options like concerts, eating out, nightlife and more meant that consumers could put their extra cash toward paying down debt.
While having debt isn’t inherently “bad,” it’s still important to be aware of how much debt you carry in relation to the amount of credit you have available. This credit utilization rate makes up 30% of your FICO score. Having $5,000 in credit card debt doesn’t sound like a lot of debt if your credit limit is $20,000 (in this case, your utilization is just 25%). But if you have $5,000 in credit card debt and a credit limit of $10,000, suddenly your utilization jumps to 50% because you have a lower amount of available credit.
Interest charges can make paying down credit card debt harder, especially when you consider the fact that the average interest rate for credit cards ranges from 15.56% to 22.87%. In some cases, you might be able to put more of your payment toward the principal amount by using a balance transfer credit card. Ones like the Wings Visa Platinum Card have no balance transfer fee and carry an interest rate as low as 8.15%.
The Citi® Double Cash Card, on the other hand, lets you make a balance transfer without paying interest on the amount transferred for the first 18 months (after, 13.99% – 23.99% variable), which can potentially save you significant cash. Balance transfers must be completed within 4 months of account opening. While this offer doesn’t apply to new purchases made with the card, having the interest-free period can help you pay off that existing balance quicker.
