Tips For Improving Your Credit Score
As you likely already know, your credit score is an important factor in determining whether or not you qualify for a home loan. This number can range from 300 to 850. The higher this score is, the more appealing you are to lenders. If you’re looking to improve your credit score, you’ll be happy to know that no matter how low your score is, there are always methods available to boost it. Here are some tips for improving your credit score.
Why Should I Care About My Credit Score?
Your overall financial health will greatly improve if you have a good or excellent credit score. Those with favorable credit scores typically save hundreds of thousands of dollars throughout their life. This is because lenders tend to award those with good credit scores better rates on mortgages, auto loans, and other forms of financing. The higher the credit score, the lower risk you are to a lender.
Poor credit scores, on the other hand, indicate that you’re a higher-risk borrower. That means fewer lenders will want to work with you and the ones that will often get away with charging obscenely steep annual percentage rates (APRs). Poor credit scores may also affect your ability to rent a home or car.
Know Your Credit Score
The first step in improving your credit score is knowing what you’re working with. You can easily check in on your credit score online. Soft inquiries are a way to get an estimate of your current credit score. This does not impact your credit score. Quite the contrary actually. Regularly checking your credit score can be a great way to work on financial health and keep an eye out for potential identity theft.
There are three major national credit bureaus where you can retrieve a copy of your credit report from – Equifax, Experian, and TransUnion. To access these reports via a soft inquiry, you can use a few different methods. Once a year, you can access a free and accurate report at the official AnnualCreditReport.com website. You can also use services such as Credit Karma, NerdWallet, and CreditWise.
Do keep in mind that hard credit inquiries can have an impact on your credit score. For instance, you might notice a dip in your credit score after you apply for a car loan. Keep these sorts of credit inquiries to a minimum.
What Affects a Credit Score?
There are several factors that contribute to your credit score. Payment history, credit usage, age of credit accounts, credit diversity, and credit inquiries are all a part of the puzzle.
Payment History
This part of your credit history makes up approximately 35% of your credit score. Keeping up with your payments is vital. Even a single missed payment can cause your score to dip.
Credit Usage
Credit usage is another major piece of the puzzle. Making up roughly 30% of your credit score, your credit utilization ratio is calculated by dividing the total revolving credit you are currently using by the total revolving credit limit on all of your accounts.
Credit History Length
The next largest factor contributing to your credit score is your credit history length. Coming in at about 15% of your credit score, it factors in your oldest credit accounts and newest. You then receive an average age of all of your accounts.
Credit Diversity
It’s important to cultivate a diverse portfolio of credit accounts. This is about 10% of your credit score. For instance, it’s not enough to just have a credit card or two – those with the best credit scores have credit cards, student loans, car loans, mortgages, and more. The key is to have a reasonable monthly bill that is well within your means.
New Credit
Finally, the number of credit accounts you’ve opened recently will factor into about 10% of your credit score. Every new account you open will pull a new hard inquiry on your account. This can potentially cause your score to dip.
Steps to Improving Your Credit Score
You can always turn your credit score around. There is no hopeless case. With patience, hard work, and dedication you can get your credit score into the good to excellent range. Here are the best ways to do so.
Pay Your Bills on Time
This can’t be emphasised enough. If you make late payments, you can’t effectively raise your credit score. In fact, late payments can stay on your credit report for up to 7.5 years. You can do everything else right and still have a bad credit score if you’re not making your payments on time.
Use Your Credit Cards Less
Your credit utilization ratio is the second most important factor in calculating your credit score. It’s a good rule of thumb to keep your credit usage under 30% of the limit on any credit line. But the lower you keep this figure, the better. Paying off your total credit card balance each month is a great way to keep your credit utilization ratio down. You can also pay your allotted bill every month and not add more to your amount owed.
Request a Higher Credit Limit
You can “shrink” your credit utilization ratio by increasing your credit limit. Assuming you don’t add to your credit usage, the higher your limit is, the lower your utilization ratio will be. You may qualify for an increased credit limit if your credit score has improved or you have a higher income than when you initially applied for the line of credit. Take a Break From Opening New Accounts
Every time you open a new account you add another hard inquiry to your credit report. It can also decrease your average credit age. While having diverse credit is a great tool to increase your credit score, there is a time and place for it. As you’re building up your credit, take a pause on opening new accounts. And once you do decide you’re in a stable position to open a new line of credit, be discerning with your choices. Be sure you can afford the monthly payment and that the benefits outweigh any potential dings to your credit score.
Becoming an Authorized User
Your friends and family with high credit scores can help you bolster your own score! If they have a good history of on-time payments as well as a high credit limit, you can raise your credit score by becoming an authorized user on one of their accounts. It adds an account to your credit report without the negative strike of a hard inquiry. That means you can improve your credit usage ratio as well as potentially your overall credit history length. This is a trick called “credit piggybacking”.
Take Care of Collections Accounts
Collections accounts can put a major ding in your credit score. Be sure to pay these off as soon as possible. This will also reduce the likelihood of getting sued over the debt. You may even be able to persuade the collection agency to stop reporting it as debt once you settle your payments. Be sure to check in on previous collections accounts to see if they can be removed for inaccuracy.
Find Unique Ways to Bolster Your Credit
“Thin credit” can be an issue when you want to increase your credit score. If you don’t have enough credit history on your report to generate a credit score –or if you simply have poor credit– you can find different ways outside of opening new accounts to boost your score. For instance, you can use a free Experian Boost to collect financial data such as banking history, utility payments, and rental payments to boost your score. UltraFICO offers a similar benefit.
In Conclusion
Low credit isn’t a death sentence. You can always, always bounce back from financial hardship. It can be a daunting challenge but with determination and wise choices, you can earn a higher credit score. Follow these tips and lean on budgeting tactics to bolster your bank account. Before you know it you’ll have a credit score lenders will love!