How to Improve Your Credit Score
Posted on May 22, 2019 by CHS
Today, good credit is used for much more than just getting a credit card or a loan. Many businesses, such as satellite or cellular companies, require that you have good credit before they extend products or services to you. Employers may also request to check your credit when you apply for a job. A high credit score can reflect a history of paying your bills on time, while a low credit score might show a history of late or missing payments or a high amount of debt. Having a good credit score may help provide your family a stable home, a safe and reliable vehicle, and lower interest on loans.
Your Credit Score
A credit score is a numerical value that is based on an analysis of a person’s credit files. The credit score is then used to represent the creditworthiness, or financial reliability, of an individual. The most commonly used credit score is the FICO score, which is calculated by the Fair Isaac Corporation. FICO scores can range from 300 to 850 and are provided by one of three credit reporting agencies – Equifax, Experian, or TransUnion.
When you have a FICO score that is higher than 680, it indicates you are in a good standing, while scores above 740 could qualify you for lower interest rates on loans. The five major factors that influence your credit score and the percentage of influence they have are: your payment history (35%), level of debt/credit utilization (30%), age of credit (15%), mix of credit (10%), and credit inquires (10%). If you have a low credit score, you can still repair it. While raising your FICO score will take time, the following steps can be taken to begin increasing your score.
Building Your Credit Score from Scratch
A person may have a “thin credit file” if they have very few or no credit accounts listed on a credit report. This means banks or lenders may be hesitant to provide credit cards or loans, as the person has yet to have a chance to demonstrate financial reliability. This is common for people who are young or haven’t yet established a credit history. There are options for those of us who are in this situation. For example, a young student can open up a student credit card as a way to build credit history. While student credit cards may have lower borrowing limits and higher interest rates than traditional cards, these limits can help new borrowers spend only what they can pay off every month. Others can apply for a store card from various retailers or gas stations, apply for a secure credit card at their bank, or apply for a credit-builder loan. You can learn more about these options at How to Qualify for New Credit with No Credit Score.
Obtain a Copy of Your Credit Report
Before starting anything, it is best to figure out where you currently stand with your credit score. You can obtain a free annual credit report at Annual Credit Report and see if there are any errors that need to be disputed. Review and make certain there are no late payments listed incorrectly on any of your accounts, as that can lower your credit score. To dispute any discrepancies, contact the credit bureau.
Reduce the Debt You Owe
If you have unpaid debt, you can contact the credit companies to begin a repayment plan in order to pay the debt off as you try to improve your credit score. If possible, stop using your credit cards while you pay off your debt to avoid further debt. Next, review your account statements to determine the balances and interest rates for each of your accounts. Devise a budget and plan to make payments towards the debt with the highest interest rate first, while paying minimum payments on your other accounts. Learn about budgeting and saving money by reading our blog, Tips for Budgeting and Saving Money. Paying off all of your debt might take some time, but once it is paid off, you will see the impact reflected in your credit score.
Keep Your Credit Card Balance Low
Many people believe having a high credit card balance is fine as long you are able to pay your full balance each month. However, a high balance can raise your credit utilization. Credit utilization is how much credit you have compared to how much you are spending. For example, if you have a credit card balance of $400 and your credit limit is $1000, your utilization ratio for that card would be 40%. It is recommended to have a lower percentage of credit utilization; the optimum is 30% or lower. Read more about credit utilization at Understanding Credit Utilization.
Pay Bills on Time
Your payment history is 35% of the factors that makes up your credit score. Make sure to pay all your bills on time. This includes your mortgage, utilities, auto loans, credit cards, student loans, and any other bills you may have. Even being a couple of days late with bills can have a negative impact on your credit score. If you miss any payments, pay them off as soon as possible. The longer you consistently make your payments on time, the more your credit score will improve. Over time, the poor marks caused by late payment will fade away as you establish a good payment pattern. Keep in mind that your record remains active for 7 years. Learn about how to organize your household bills by reading our blog, Tips on Organizing Your Household Bills.
Don’t Close Old Credit Cards
It is logical to think that since you have a new credit card and won’t be using your old one anymore that it would be wise to close that old account. However, closing your old credit card can actually lower your credit score. This is because 15% of your credit score is determined by the age of your credit, meaning that a longer credit history will improve your score. Closing the old card also means you are lowering your available credit, and this can result in a risk of receiving a higher credit utilization ratio.
Open New Credit Cards Responsibly
As your credit score improves, more options for credit cards will become available to you. However, it is crucial that you open new credit cards conservatively because it can impact your credit score. Only open a new card when you need it, and not because you want to create a mix of credit. For example, if you are planning on flying often, it may be a good idea to open up a card that offers rewards like airline miles or cash back for rebates. It is not a good idea to open too many credit card accounts as each inquiry you make can impact your credit score. Also note that opening a new credit card can lower your average age of credit, especially if it’s been a while since you last opened one. On the other hand, opening a new credit account can also raise your credit utilization since your credit limit will increase. Take careful consideration when opening a new credit line.
Credit Card over Debit Card
Although both cards seem similar, they each have different functions. When you use a debit card instead of a credit card, it does not build any credit history or provide you with benefits like receiving cash back, and you are using your own money from your bank account. If your debit card is stolen, you may potentially be liable for all the purchases made illegally on your stolen debit card. Your credit card might be refunded faster because your bank is dealing with credit as opposed to cash. However, if you are in the process of paying off your debt, it would better to use your debit card instead of a credit card. This will allow you to track exactly how much you are spending, which might help you make more informed purchases
Rebuilding your credit score is a long term project, not a short term fix. Stay patient throughout the process and research effective methods for improving your score.
Below is additional information to better educate yourself about improving your credit score.