Move over GPA, there's another number that has an even greater effect on your lifestyle and future now that you're out in the real world—your credit score.
That 3-digit number calculated based on your credit mix, payment history and debt load—plays a key role in determining your ability to borrow money, get a new credit card, buy a car, get an apartment and even land a job. "A better credit score can open up doors of employment, better housing, and save you money in loan payments," says Sean McQuay, a credit card analyst at NerdWallet.
The most common credit score is the FICO score. It is calculated using software from Fair Isaac Corporation, which goes by the acronym FICO. Your FICO score can range from 300 to 850. The average FICO score is 695. Typically, anything above 680 is good and a FICO above 740 will qualify you for the best rates on loans, depending on the lender.
FICO scores are calculated from many different pieces of credit data grouped into five broad categories: new credit (10%), types of credit in use (10%), length of credit history (15%), the amounts you owe (30%), and, the most important, your payment history (35%).
Many millennials haven't given their credit score the respect it deserves. Two-thirds of young adults said they made a major credit mistake before age 30, a Credit Karma survey found. If you've found yourself in that camp, whether it's maxing out your credit cards or late payments, the good news is that it's fixable. But it takes time and work, so you'll want to get started soon. Try these strategies to boost your score from credit risk to credit gold:
Check the facts
Your first step to a better credit score is to review all of the information on your credit reports. One in 4 consumers find errors in their credit reports that could affect their credit scores, a Federal Trade Commission study found.
You can get free copies of your credit reports each year from the big three U.S. credit reporting agencies at AnnualCreditReport.com. Online services, such Quizzle.com, Credit.com and CreditKarma.com, also offer free credit reports and credit scores as well as tools for how to raise your score.
What should you look for to find errors in your credit reports? Payments marked as late that you paid on time, records belonging to someone else or any negative marks that aren't accurate, says Michael Schreiber, editor-in-chief at Credit.com. If you find anything negative, contact the credit reporting bureaus to get the errors fixed as soon as you find them.
Improve your ratios
Two ratios are important to your ability to borrow: credit utilization and debt-to-income.
"Credit utilization—your total outstanding balances compared with your total available credit limits—is one of the biggest factors in your credit score," says Bethy Hardeman, chief consumer advocate at Credit Karma. "Aim to keep your credit utilization under 30%," she advises, "although less is better."
If your ratio is out of whack, there's a few things you can do to improve it. Paying down balances is your best bet. You can also request an increase in your credit limit or even open a new card, but only if you won't run up your balances. "Each additional credit card you have can help keep your credit utilization rate low, if you're also able to keep your spending in check," Hardeman says.
"One surprising thing can damage your credit utilization ratio is closing old accounts. While it may seem responsible to cancel cards you're not using, this can actually damage your credit," Hardeman says. How? By decreasing the length of your credit history, which is factored into your score, and lowering your available credit.
Though it doesn't directly affect your credit score, keeping your debt-to-income ratio, which is your monthly amount of debt divided by your monthly income, below 36% can make you more attractive to lenders. Why? A debt-to-income ratio below 36% gives lenders more confidence that you can pay back your debts. Bankrate provides a free calculator that can help you determine your debt-to-income ratio.
The most important thing you can do for your credit score is pay your bills on time and keep your spending under control, Schreiber says. Missing even one payment can ding your score up to score up to 110 points, according to credit bureau Equifax, and late payments can stay on your reports for as long as 10 years.
Setting up automatic payments is the best way to ensure you never miss a due date. Some companies even provide discounts to people who sign up for automatic payments. For example, CommonBond offers a 0.25% discount on your student loan rate if you sign up for autopay.
All these steps to boost your credit score take time. It could take six months to over a year before you see a significant change in your score, McQuay says. "Credit scores are designed to move slowly," he says. "It takes time to prove improvement in financial management."