5 Easy Ways To Improve Your Credit Score
Improving your credit score is one of the best investments that you can make in your financial life. Your credit score may determine whether you qualify for a student loan, mortgage, auto loan or credit card. Your credit score also may be used when you apply for insurance, rent an apartment or purchase a cell phone. Follow these five easy steps to help improve your credit score!
1. Check your credit reports for accuracy
It is essential that you obtain a copy of your credit report and check it carefully. The Federal Trade Commission found that 5% of consumers had one or more errors on their credit report. There are three major credit bureaus: Experian, Equifax and TransUnion. Each credit bureau collects information on your credit history and develops a credit score that lenders use to assess your riskiness as a borrower. Under federal law, you are entitled to view your credit report every 12 months from each credit bureau. Since each credit bureau may have different information about your credit history, your credit score may vary across the three lenders. For a free copy of your credit report, you can visit Annualcreditreport.com. If you find an error, you should report it to the credit bureau immediately so that it can be corrected. Your credit score will not improve over night, but the sooner you take action, the better.
2. Develop a financial track record
If you already have a credit history, but want to improve your credit score, you need to demonstrate that you are financially responsible. To do so, you need to develop a financial track record in good standing. Credit card companies, for example, closely monitor both your payment history and account age (how long the account has been open in good standing). If you have a credit card, start by making small purchases and paying off the balance in full each month. The longer that you can keep open a credit card in good standing, the better (so that you can increase your account age). Consistent on-time payment history and a long account age demonstrate both financial discipline and responsibility.
3. Do not open or close multiple credit cards at once
Opening multiple credit card accounts at once will result in several hard inquiries to your credit report, which can cause your credit score to drop (at least temporarily). Credit card companies also will view you as a risky borrower. Likewise, if you have multiple credit cards, do not close them all at once. Even better, if you have an older credit card and it does not have an annual fee, you should consider keeping it open to demonstrate a longer credit history.
4. Keep your credit card utilization low
Lenders evaluate your credit card utilization, or the relationship between your credit limit and spending in a given month. If your credit utilization is too high, lenders consider you higher risk.
Ideally, your credit utilization should be less than 30%. For example, if you have a $10,000 credit limit on your credit card, ideally you should spend less than $3,000 in a given month. If you can use cash in lieu of a credit card to reduce your credit utilization to 20% or even 10%, your credit score should be even higher.
Here are some ways to manage your credit card utilization:
Set up automatic balance alerts
Ask your lender to raise your credit limit (this may involve a hard credit pull so check with your lender first)
Rather than pay your balance with a single payment at the end of the month, make multiple payments throughout the month
Credit utilization is reported to the credit bureaus monthly at your closing date. Therefore, anything you can do to reduce your balance during the month before your closing date will help improve your credit score.
5. Pay your bills on time
Paying your bills on time is a major contributor to your credit score.
Whether it is your utility bill, rent or student loan payment, you should always pay your bills on time. Failing to pay your bill on time can hurt your credit. FICO scores are weighted more heavily by recent payments so you can “override” a past missed payment by developing a pattern of more recent on-time payments. Therefore, if you have a delinquent payment, pay off the balance. However, missing a payment altogether can stay on your credit report for seven years.
To avoid a late or missing payment each month, enroll in automatic payment with your service provider. Some service providers, such as student loan lenders, provide a financial incentive when you enroll in auto pay. For example, you may be eligible for a 0.25% interest rate deduction with your student loan lender when you enroll in automatic payments.