keyboard with credit card score words and pens

Not too long ago, a reader on my blog asked me “Is 700 a good credit score?” I explained to her that it is a decent score, but in today’s economy I would no longer consider it good. Creditors are now pickier than ever when it comes to granting credit and although a 700 credit score would have gotten you far in the past, it won’t today. Now more than ever, a high credit score is important.

But whether you currently have a 605 or a 755, what are ways of improving your credit score? Besides paying off credit card debt, here are 3 tips you should keep in mind:

1. Don’t forget about credit utilization
On a revolving credit account (a credit card) the percentage of credit used is called Credit Utilization Rate, or CUR for short. For example, if you’re limit on a card was $5,000 and you were using $1,000 of it, that would be 20% CUR. This number is then used in the FICO credit scoring formula; the higher the CUR, the more it will adversely affect your credit score.

Now you may be asking “How do they expect me to use my credit cards then if I’m just going to get punished for it?” Well, you won’t necessarily get punished for it… a low CUR will not hurt your credit score. But what’s low? That’s the million dollar question. FICO keeps their formula secret so it’s impossible to know the exact answer. Some sources claim utilization of 10% or above is bad, while others say it’s 30% or above. In my opinion, I think it depends on a number of factors specific to ones account, but as a general rule of thumb, I usually recommend people stay under 25% of their credit limit.

2. Remember both revolving and installment credit
I mentioned above that revolving = credit cards. Installment credit refers to loans where you pay a fixed amount each month – i.e. mortgages, car loans, student loans, and so forth. If you want a really high credit score (as well as a good looking credit report) it’s important to have both on your credit file.

I found this out the hard way. For years I only used credit cards and then when it came time to apply for a used car loan, I was denied. My credit score was high but the lender couldn’t approve me because I had no installment loans listed on my credit report. So yes, it is possible to achieve a relatively high score using revolving credit only (like in the 750 to 775 range). However, if you want to be eligible for all forms of lending, then it’s important to have a history of installment credit, too.

3. Do not needlessly apply for credit
Although I talked above about the importance of having a mix of credit, that doesn’t mean you should go out and needlessly apply for it if you don’t need it. Every time you submit a credit card application, apply for a loan, get cable TV, or even open a new cell phone account, a credit inquiry is made.

There are two types of credit inquiries – hard and soft. The latter does not affect your credit and is only visible to you. Examples of soft inquiries would be checking your own credit report, credit checks for employment, a review of your report by existing lenders, and a tenant screening by a landlord. A hard inquiry is made when you apply for a credit card or loan, and these may adversely affect your credit score, at least temporarily.

How long do credit inquiries stay on your credit report? Soft inquiries usually stay on for one year and hard inquiries stay on for two years. You don’t have to worry about the soft inquiries, but you don’t want to have too many hard inquiries on your credit file. A couple at any given time shouldn’t be a problem, but you certainly don’t want 5 or 10 on there.

What other tips do you have for improving your credit score?

This guest post was written by Mike, the founder of Credit Card Forum, a website primarily for credit card reviews but also for the general discussion of all things related to credit.

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