How to Improve Your Credit Score
Credit has become the most popular payment method. 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.
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.
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.
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.
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.
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.
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.
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.
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.
Cary Silverman is a consummate entrepreneur having sold multiple companies during his 20 years of business experience in the financial industry, but for him, it isn’t about the money. His success is rooted in his passion to focus on doing something better today than it was done yesterday. These days, he’s the CEO of Waldo General, Inc. that oversees the operation of King of Kash.