How to Improve Your Credit Score
Credit has become the most popular payment method nowadays. You can buy nearly anything like homes and cars to menial daily things like your morning coffee or lunch. Putting it on tab has become such a common practice that many people don’t even think twice and it’s a habit that’s really hard to shake.
When you get a line of credit, you feel bold and empowered. You don’t need cash to buy the latest TV or pay for your drinks during a night out. You can book plane tickets, hotel rooms, and survive in a foreign country with a credit card. However, how you use your line of credit can deeply impact many aspects of your financial life. Having a poor credit rating can keep you from getting what you want out of life.
One look at your credit score and lenders will immediately know your financial standing. You need to take good care of your credit score and maintain a high rating so you can continue to enjoy the many perks that come with being a credit holder. However, this takes a lot of effort and starts with spotting possible errors in your credit report and continuously improving your credit score over time.
Why Is Your Credit Score Important?
Your financial life can be summed up by the three-digit figure you see in your credit report (your credit score) and typically ranges from 300 to 850. The higher your credit score, the better. Your credit score is used as benchmark in many things in life, including but not limited to buying a home or car and being approved for credit cards.
When it comes to finances, your financial responsibility is often gauged by your credit score. Your credit score is that one figure that sums up how you use up credit, how you pay bills, and manage your finances overall. If you fail to pay bills on time, your credit score will go down. If you declare bankruptcy, your credit score will suffer.
The score tells you how much credit you have, how you use it, how timely you pay your bills, the age of your credit lines, and mixture of credit.
Ability to Borrow Money
Lenders and credit issuers typically look at your credit score in order to determine if you are going to be a fit borrower. The universal rule has always been the higher your credit score, the less risky you are. With lower risks, the lender deems that you’re going to be a responsible borrower and will be more inclined to extend lower interest rates. If you have poor credit score, you have to contend with restricted terms and higher interest rates. Some lenders even refuse to lend money to borrowers that don’t meet their minimum credit score.
Purchase a Home and/or Vehicle
The two single biggest purchase you make in your life is a home and a car. You’ll most likely need to apply for a loan to get them. Like consumer loan lenders, mortgage and auto loan lenders look at your credit score to determine if you meet their prerequisites.
Chances are, a lower credit score will land you with higher fees and penalties. There will probably be higher monthly installments too. On the other hand, a good credit score will give you some leverage during the negotiation process and allows you to obtain the loan with lower interest rates. That would spell thousands of dollars saved all throughout the life of the loan.
Better Insurance and Utility Packages
The cost of your insurance premiums and utility like internet and cable can benefit from a better credit score. In many states, insurers and utility service providers look at their customers’ credit scores to determine if a certain package or upgrade is in order. If you’ve been a good long-time paying customer and have excellent credit score, you may be able to negotiate for an upgrade of service packages and snag better deals.
In some cases, customers can get denied with utility services due to poor credit score or they may be required to pay security deposit and other upfront fees to be able to afford the service.
What’s in Your Credit Score?
Your credit score is defined by the three-digit figure you see on your credit report. There’s a number of credit scoring systems in use today, but one that’s most prominent is the FICO credit score. Your credit score can be somewhere between 300 to 850 and there are many factors that come into play in determining your credit score, but FICO credit scores are typically broken down into the following components:
- Payment History (35%) – a good portion of your credit score is determined by how good you are at paying your debts and bills. FICO takes into consideration how promptly you pay your past debts and use this to determine your possible future behavior on other debts. Additionally, you make greater dent on your credit score if you fail to follow the payment schedules for larger debts like mortgages than on small revolving debts like credit cards.
- Credit Utilization (30%) – credit utilization refers to how much credit you use against your available credit. If you use a big portion of your available credit and you constantly max out your credit cards’ limit, your credit score will naturally go down. Decrease your use of available credit to 30% or less and your credit score will also go up. Don’t max out your credit cards and pay your bills on time and it will be even healthier for your credit score.
- Length of Credit History (15%) – people without or have new credit history typically don’t have the best of credit scores simply because there’s no enough data to determine their financial behavior with. It matters more that you have long credit history because credit bureaus and lenders use this to forecast your future financial behavior. Keep your accounts open and maintain them for a long period of time in order to provide enough financial data for your credit score.
- New credit (10%) – shopping for new credit lines within just a short time frame is often interpreted as hard inquiries, and these can negatively affect your credit score. Hard inquiries can make you seem like desperate for new credit and that you may be unable to handle your finances responsibly. Make sure to spread out inquiries over a long span of time and avoid opening new credit unless you really have to.
- Credit mix (10%) – the mixture of your credit (both revolving and installment accounts) demonstrates your history and ability of handling credit. Borrowers who have experience with a various credit make them more appealing and less risky to lenders.
Closely Monitor Your Credit Score
- Get your free credit report – all three credit bureaus (TransUnion, Equifax and Experian) are mandated to provide credit report once a year. You may compare credit reports from all three at the same time side by side, or you may order one once every quarter for progressive monitoring.
- Put the dispute in writing – report any inaccuracy in your credit report in written form, addressed to the credit reporting company. Specify which details in your credit report you are disputing, state the reason why you believe there are inaccuracies and attach documents that can support your dispute.
- Contact companies with inaccuracies – write to the lender, credit issuer, bank or any other organization that have issues on your account. Tell them that you are disputing such detail on your credit report and provide documents that support your claim.
- Wait for the investigation – the credit reporting company will investigate your case typically within 30 days and will move to correct the inaccuracies in your report.
- Re-check your credit report – once the issue on your file has been removed and your credit report has been updated, you may request for a new credit report to see if everything is in order.
How To Improve Your Credit Score
Now you know that an unhealthy credit score is a hindrance to better opportunities, your next step would be to improve your credit score. You can shape up your credit score by following these steps:
Always Pay Your Bills on Time
Remember that your payment history makes up 35% of your credit score. If you habitually pay your bills late, you can’t really expect to have a good credit score. However, you can boost your score by several points with timely payments.
If you constantly miss your payments due to forgetfulness among other reasons, you can set up automatic payments so that bills are always paid on time. Most banks, credit issuers, and other financing firms provide this option. Take advantage of automated payments so you can prove that you are responsible in managing your finances with minimal effort.
Keep Credit Card Balances Low
Don’t forget that credit utilization makes up 30% of your credit score, so the better you are keeping your balances low, the higher your credit score will (potentially) be.
You can minimize the use of credit cards to important and bigger purchases like hotel room bookings and plane tickets. Strive to give the full payment each month instead of just targeting the minimum.
Get to know the credit limit of each card and keep them in mind. Monitor your expenses so that you’re only using less than 30% of your available limit. Yes, you can swipe to your heart’s content until you’ve maxed out your cards, but do consider how financially difficult it would be pay your bills PLUS the interest. Then consider the fact that you’re hurting your credit score each time you max out.
Don’t Have More Credit Cards Than You Need
A shiny new credit card may give you a new credit limit along with some rewards and perks. However, do you really need five or seven credit cards?
More credit cards means more monthly payments to deal with, more interest rates, and even more financial obligation. When you miss payments on any of your cards, your credit score can dip down.
Instead, limit the number of credit cards to those most useful to you. If you don’t absolutely need to open a new line of credit, then be content with your existing cards.
Monitor Your Credit Score
Your credit score tells you how you’re performing financially and without any monitoring, you wouldn’t be on track towards a better credit standing. You can get your credit score by pulling out credit reports once a year from the credit bureaus. Some banks may provide your credit score along with your monthly bill statement.
Your credit score is an important figure so make sure you know how you’re faring on a regular basis. Also check your credit report in depth to dispute errors as early as possible.
Additionally, you need to stay current with your credit score so you can spot areas that you need to improve in order to bring it up.
Maintain a Low Credit Utilization Ratio
Impacting 30% of your credit score is credit utilization ratio. Oftentimes, this figure is inversely proportional to your credit score. Meaning, if you have high credit utilization ratio, your credit score goes down. But it also doesn’t mean that this is the single factor that can bring your credit score up.
What remains to be true is that if you keep your credit utilization at less than 30%, then you are positively impacting your credit score. With that said, you want to know your credit limit for all of your credit cards and other revolving loans and use them as minimally as you can. For instance, if your credit card has $1,000 in credit limit, strive to keep your balance at $300 or below for that card at any given time. Pay off the balance in full on time to clear off your debts.
Don’t Overextend Yourself
With all the financial pressures around you, it’s easy to overextend yourself. This happens when you spend more than you earn and live a lavish lifestyle that your paycheck can’t support. It also takes the form of keeping up with the Joneses.
Instead, be true to yourself and what you can afford. You don’t have to stop striving for things that you want, but you also need to be realistic, especially when it comes to your finances. Focus on things that matter to you so you don’t have to go into debt unnecessarily or out of impulse.
Have Multiple Forms of Credit
One good way to demonstrate how financially responsible you are is to have various forms of credit. If lenders and credit bureaus see that apart from credit cards, you also have auto loans, mortgage and student loans which you pay off promptly, then they will see you as less risky than someone who only manages one credit card.
However, that also doesn’t imply that you should open new credit just for the sake of having a good mixture. You only need to do this when a new line of credit is absolutely useful to you and you are confident in keeping up with the payments. You can have a good mix of revolving, installment, secured, and unsecured credit lines for good diversification, but make sure that each one of them is manageable and within your financial capacity to pay back.
Keep Your Accounts Open
You might be tempted to close some of your accounts in order to bring down your credit utilization ration. But keep in mind that 15% of your credit score is made up of the age of your credit. Therefore, the longer your accounts are in existence, the better it is for your credit score.
You can keep your accounts open to further increase their age over time. If you remove or close accounts that have been in great standing for a long time, you also likewise attempt to remove all the good information and data that come with it.
On the other hand, it may be a good idea to close certain accounts even at the expense of your credit score. Credit cards that have exorbitant interests or miscellaneous fees may be costing you more in payments. If you want to curtail shopping addiction, cutting off your cards may also make sense. You simply need to do a balancing act and make sure that the pros far outweigh the cons.
Minimize the Frequency of Applications
If you’re looking to apply for three or more different credit cards at different issuers to attempt to apply for consumer loans from various institutions, be prepared to see a dip in your credit score.
Each time a potential lender pulls your credit report to check your eligibility, the credit bureaus record it as a hard inquiry. Numerous hard inquiries over a few months can make you seem desperate for a new credit line, thus making you appear risky and probably not so financially responsible.
What you can do is to not make any inquiry at all if you’re not so serious about taking in a new credit line. You don’t want to shop for credit cards on impulse or out of boredom because this can negatively impact your credit score. If you’re really keen about taking in a new card, do your research first and spread out your applications to every several months and limit the number of your inquiries.
Get a Secure Credit Card
If you have poor credit score, you may get declined when you apply for unsecured credit cards.
The rejection and inquiry can hurt your credit score. However, you can opt to apply for a secured credit card to help rebuild your credit status.
A secured credit card is a type of credit card that requires a deposit which is often equal to your credit limit. Since you already have the security deposit, the credit issuer is more confident and feels secured that you will not default, and therefore treat you as less risky.
However, like traditional credit cards, you want to pay your bill off promptly each month to demonstrate to creditors that you’re on track in rebuilding your credit.
It takes some conscious effort, financial management, and time to rebuild and improve your credit score. You will not see the increase overnight, but it will happen soon if you pay off your bills promptly, keep your credit utilization to a minimum and refrain from opening and closing of accounts when not necessary.
An improved credit score can open you to better deals and financing opportunities. It can give you a good leverage when negotiating with lenders and financing institutions. It also gives you the advantage when looking for a new job, apartment or utility service provider.
Don’t give up on poor credit score because there are many steps that you can take to improve it. Be frugal, patient and consistent and you will see your credit score go up over time.