How to Improve Your Credit Score
How to Improve Your Credit Score
A good credit score can help you secure better interest rates on loans, mortgages, credit cards and other financial products. It can also lower your auto insurance premiums and even reduce the security deposit required when you rent an apartment.
It can take some time to increase your score, so start implementing these tips I’m about to share with you ASAP!
For starters, let’s take a quick look at what a credit score is:
A credit score is designed to represent your credit risk, or the likelihood you will pay your bills on time. Creditors and lenders consider your credit score as one factor when deciding whether to approve you for a new account. Your credit score may also impact the interest rate and other terms on any loan or other credit account for which you qualify.
There are three nationwide Credit Reporting Agencies: Equifax, TransUnion, and Experian. Your credit scores may be different at each of these agencies, but as long as all of your lenders have reported all of your credit to each of them, the scores should be fairly similar.
Credit scores range from 300-850. Lenders will have their own breakdown of these ranges, but they are generally similar to the following:
300-579 Poor Credit
580-669 Fair
670-739 Good
740-799 Very Good
800-850 Excellent
How quickly you can increase your credit score depends on a number of factors. But regardless of where you are starting, the following 8 tips will help you improve your credit score over time:
Pay all of your bills on time.
Your payment history is the most important factor in determining your credit score. This shows creditors whether or not you can be trusted to uphold your end of an agreement to make payments on time if they loan you money.
Set up account reminders or schedule automatic payments for at least the minimum amount due.
Late payments can stay on your credit report for 7 years! So you do NOT want to be late!!!
If you are behind on any of your payments, get current ASAP! If you have a history of paying on time, but failed to do so once, call your creditor and ask if they will consider no longer reporting the missed payment to the credit bureaus.
Reduce your Credit Card Balances.
More specifically, reduce your Credit Utilization Rate. This is the second biggest factor affecting your credit score.
Your credit utilization rate is the balance you currently have on a credit card or line of credit, divided by the total credit limit of that card or credit line.
You should aim to use no more than 30% of your credit limit on each card. Using less is even better. People with the highest credit scores tend to keep their credit utilization below 10%.
So, for example, if you have a credit card with a limit of $5,000, using the 30% guideline you would need to keep that balance below $1,500. Using the 10% guideline, you would need to keep that balance below $500.
If you currently have credit cards with balances above these thresholds, work to pay them down as quickly as possible!
Another way to reduce your credit utilization rate quickly is to increase your credit limits.
WARNING!!! ONLY DO THIS IF YOU ARE ALREADY IN CONTROL OF YOUR SPENDING AND WILL NOT BE TEMPTED TO USE THE ADDITIONAL CREDIT!!! If you think you may be tempted to rack up additional credit card debt, then definitely DO NOT DO THIS! Please, do not do this!
So, as long as that does not apply to you AT ALL, then here is what you can do:
Contact your credit card companies and request an increase to your credit limit. You can usually do this online, but you can also call them on the phone. They may or may not grant an increase, as it will depend on how long you have been a customer with them, your payment history, and if your income and/or credit score has changed since you originally applied.
Think twice before closing old accounts, especially your oldest account.
Your length of credit history is a factor in determining your credit score, so keeping an old account around can be very beneficial.
If it’s an old credit card that you don’t prefer to use because it does not offer much or anything in the way of rewards, consider using it for automatic monthly payments for something small such as a streaming service. Then, to make things super easy, set up automatic payments from your checking account to pay the card off in full each month so you don’t have to worry about forgetting about it.
Limit How often you apply for new accounts
When you apply for a new loan or credit card, it will almost certainly trigger what’s referred to as a hard inquiry, which can impact your credit score. Having too many hard inquiries over a relatively short period of time can cause your score to go down.
Hard inquiries may occur when you apply for a new credit card, mortgage, car or other loan, or an apartment lease.
Note that when you are rate shopping for a mortgage or auto loan, you may have multiple hard inquiries over a very short period of time. Credit scoring models can recognize this as rate shopping, so will likely group these together and treat them collectively as a single hard inquiry as far as affecting your credit score, if they occur within a short time frame.
Additionally, opening new accounts will decrease the average age of your accounts, which could also negatively impact your credit score. So remember to be intentional and strategic about opening new accounts.
Having a variety of credit types can help your score.
I am only mentioning this because it does have an impact on your credit score, but I am definitely not going to suggest going out and borrowing money just to possibly add a few points to your score.
Mortgages, auto loans, and credit cards are each different types of credit.
So if you only have a credit card, and no other debt, then opening an additional credit card may help. Same for if you only have a mortgage and no other credit.
But again, if all you have are credit cards, don’t go out and get a car loan just to have a different type of credit added to the mix.
Consider applying for a secured credit card.
This tip only applies in certain situations. For example, if you have little or no credit history, or if you have poor credit history, you may find it difficult to obtain new credit. In this case, consider applying for a secured credit card to help build your credit history and your credit score.
This type of card is backed by a cash deposit that you provide to the credit card company. This removes the risk from the card issuer, so they are much more likely to grant this type of card even if you have poor or no credit. You use it just like a normal credit card, so paying on time each month helps build your credit history and increase your credit score.
Pay off any accounts you may have in collections.
If you happen to have any accounts in collections, work to pay them off as quickly as possible. You may be able to persuade the collection agency to then stop reporting the debt once you have paid it. It certainly can’t hurt to ask them, anyway!
If you have accounts that have been in collections for a long time, you may be able to get them to accept a smaller payoff amount if paid as a lump sum. If you negotiate this, be sure to get it in writing that the amount will be accepted as paid in full and the account will be marked as such. Get this in writing BEFORE you submit the payment! If you submit the payment before getting this in writing, the collections agency or creditor may just apply the payment to the existing balance. In this case, you will still owe any remaining amount, and will have no basis to dispute this with them since you didn’t get an agreement in writing.
Be sure to review your credit regularly.
Visit the website annualcreditreport.com to obtain your credit reports for free. You should review your credit reports on an annual basis to verify the accuracy of your information.
If you notice anything that is incorrect, report it immediately to each credit reporting agency that is showing the discrepancy. Sometimes they are simply reporting errors, but other times they may be more serious. Checking your credit reports regularly can help catch identity theft, where someone has taken out a loan or credit card using your information, or has used your information to add you as a cosigner for a loan or credit card for themselves. Again, if you notice anything that looks out of place, contact the credit reporting agencies immediately.
Now, let’s do a quick recap:
Pay all of your bills on time
Reduce your credit card balances to less than 30% of their credit limits (even better: reduce them to less than 10%)
Keep old accounts open and use them periodically.
Limit how often you apply for new accounts.
Have a variety of credit types. (but don’t go borrow money just to try to increase your score!)
Apply for a secured credit card if you have poor credit or no credit history and are unable to get approved for a regular credit card.
Pay off any accounts you may have in collections.
Review your credit reports annually.
Remember, improving your credit score is a process that will likely take some time. But the sooner you begin implementing these strategies, the sooner you can begin seeing results! If you would like to learn more about how Infinity Financial Coaching can help you gain clarity, confidence and control of your money and your future, click this link to schedule a complimentary consultation call.
