Your credit score determines everything from the type of loan you qualify for to your interest rate on that loan. Itís no secret having a good credit score can make your life easier. The problem is, maintaining a strong score can be a challenge. After all, something as simple as a few missed credit card payments can drastically lower your score.
Chances are, your score will fluctuate throughout your life. But thereís good news. Regardless of how low your score is, there are ways you can boost it. In this article, we highlight six tips to help improve your credit score.
When was the last time you reviewed your credit report? If itís been a while, you should consider taking another look. Credit reports provide a detailed look at your credit score and the factors contributing to it. Your report will show whether you have a history of late payments or whether any bills have been sent to collections. It will list the number of credit lines you have open and more.
Keep in mind, credit reports can be inaccurate. There might be false information in your report that could be impacting your score. By reviewing your credit report on a regular basis, you have a better chance of finding errors and reporting them.
Most of us know the importance of a good credit score. But fewer of us understand what makes up a credit score. There are five specific factors credit bureaus use to calculate this score, and each factor makes up a certain percentage:
- Payment history (35%)
- Credit utilization (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New credit inquiries (10%)
Payment history is exactly what it sounds like ó how well you pay your bills. Credit utilization is the amount of credit used out of the credit you have available. Credit history length refers to the length of time youíve had your credit accounts open. Your credit mix involves your different types of credit (e.g., car loans, credit cards, student loans). Credit inquiries take place whenever you apply for a new credit account; the more inquiries, the more they ding your score.
By understanding what makes up your score, you can focus on the factors bringing your score down. For instance, payment history makes up the largest percentage of your score: 35%. If your credit report shows your payment history is less than stellar, improving it is a good place to start.
One of the best ways to improve your credit score is by using a credit card. Trouble is, itís difficult to get approved for a credit card if you have bad credit. Ironic, isnít it? Thankfully, there are credit card options specifically designed for individuals who either donít have a credit score or have a poor one.
A secured credit card is similar to a traditional credit card, except it requires a deposit. The deposit is usually equivalent to the credit limit. This deposit works as a safeguard in the event you stop making payments. As with traditional credit cards, as long as you keep your secured credit card account in good standing, your score should improve.
As mentioned above, your credit usage (aka credit utilization ratio) is one of the biggest factors in determining a credit score. The less of your available credit youíre using, the better. In fact, according to financial experts, you should keep your credit utilization ratio below 30%.
To calculate your credit utilization ratio, divide your outstanding balances by your total available credit. To get the percentage, multiply that number by 100. For instance, letís say you have one credit card balance of $5,000, and your total credit limit is $20,000. Divide the two and then multiply that number by 100. Your credit utilization ratio is 25%.
One of the easiest ways to keep your credit utilization low is to completely pay off your credit card balance each month. If you can only pay the minimum each month, then make sure you donít spend too much of your credit limit.
Sure, you need to use your credit card to improve your credit score. That doesnít mean you should go crazy and open scads of new credit card accounts, though. In fact, you should avoid doing so because every time you open a new account, youíre subject to a hard inquiry.
A hard inquiry is when a credit card issuer or other lender requests to review your credit report. Simply requesting this report lowers your score. One hard inquiry probably wonít make too much difference, but you should avoid multiple hard inquiries in a short time frame.
Instead of closing old accounts and opening new lines of credit, keep open the lines you have now. Remember, the length of time youíve had credit accounts open makes up 15% of your score. That means the older a credit account is, the better. So donít close existing accounts (even if youíre not using them) in an attempt to boost your score.
Letís be honest, monitoring your credit score can be stressful and time-consuming. Yet keeping track of your score is crucial. After all, how can you know your score is improving if you donít regularly check it? You canít.
Consider working with a credit monitoring service so you donít have to keep track manually. These services will keep an eye on your credit history over time and make a note of any new accounts. If thereís new activity or changes on your report, these services will let you know. While these services canít necessarily stop your identity from being stolen, youíll be able to catch any fraudulent activity sooner.
Credit Karma is a well-known credit monitoring service. This free service keeps track of your score and sends you alerts from TransUnion and Equifax. Credit Karma will let you know where your score stands, and whether itís good or bad.
Improving your credit score will take time, but donít give up. By following the tips above and making changes to how you spend and budget your money, your score will eventually improve.