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The Tip Jar: Why your credit score matters, and how to boost it

You save a lot, you’ve never been in debt, you’ve never spent on a credit card, yet the moment you apply for a mortgage you get rejected.

Doesn’t seem fair, does it? Though there are very few people who find themselves in the above scenario, it serves to highlight the importance of having a credit history.

Before giving you money, lenders want to feel confident they’ll get their money back (and, obviously, make more off of you). One of the metrics they use to judge this is your “credit score,” which determines how effective you are at managing debt.

What is your credit score?

The two best-known credit ratings are the FICO score and the VantageScore. Experian has more details on them here, but they range between 300 and 850, and you’ll want a score of at least 650 to get better deals from lenders.

They are compiled using information from lenders, and in recent years have also started using payment data from utility companies and cellphone providers.

CNBC reports credit scores look at your payment history, amounts owed, the length of your credit history, the types of credit used, and the amount of new credit you have taken out.

There are three major credit reporting companies: Experian, Equifax and Transunion, and under federal law you can check your credit reports free of charge once a year via AnnualCreditReport.com.

How to improve your credit score

MoneyUnder30 reports that the difference between a 625 and a 750 FICO score on a mortgage could be half a percent in interest, which could cost you more than $20,000 over the life of a 30-year, $200,000 mortgage.

The higher your credit score, the better the interest rates you will get on your loans, mortgages and credit cards, so it really pays in the long-run to boost your score. Here are a few tips to do this:

Make your payments on time

If you have an auto loan, make sure you have enough money in your account to meet your monthly payments. If you have a credit card, pay off the entirety of your bill every month. This shows you’re a reliable borrower.

Also pay your insurance, electricity and gas bills, your rent, and even library debts on time. Although not all late payments are reported to credit agencies, if your creditor ends up going to a collections agency to retrieve the debt, it may end up on your credit report.

Keep your credit balance low

Credit scores take into account something called “credit utilization ratio,” which means how much of your available credit you’re using.

If you’re using more than 30 percent of your available credit, that starts affecting your score – so if you have a $2,000 limit, try to keep your balance below $600.

Don’t have too many credit sources

If you have multiple credit cards, on top of other loans, it shows to lenders that you need a lot of debt. So don’t go opening multiple lines of credit in a short period of time. It looks desperate.

That said, Bankrate explains here why it doesn’t affect your credit score if you make multiple auto/student/mortgage loan applications in a short time period.

Think twice before closing a credit account

Closing a credit account can have a short-term impact on your credit score as you suddenly have less available credit, so your credit utilization ratio (explained above) will probably rise.

That said, there are occasions where you should consider closing a credit card account, such as unused cards that carry an annual fee. USA Today has more on this here.

It also says it’s better to close newer cards than older cards. Older cards carry longer payment histories which look better to lenders (provided your payment history is good). These stay on your credit record for 10 years after the account is closed.

The Tip Jar is a new, regular feature from GoMN looking at young people and money. If you have any burning cash questions you need answered, email adam@gomn.com.

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