Improve your credit score to access better interest rates and terms
There are many aspects that make up your credit score. Here are 9 ways you can work to increase it.
Throughout your life, how you manage various types of credit is documented on your credit report — and that activity forms your credit score. If lenders see something less than savory in your borrowing history, they may view you as someone who’ll either miss or make late payments. This can lead to the possibility of being denied or getting approved with unfavorable rates and terms.
Our guide teaches you about what information goes into a credit score and, most importantly, how to improve it to make you an ideal credit candidate.
9 strategies to improve your credit score
Improving your credit score can be a slow process, but it could help you get a better finance deal down the road with more flexible options and better borrowing terms.
1. Order a copy of your credit report
Request a free credit report from the major bureaus to make sure that lenders see only the most accurate picture of your financial health. If you discover any errors, file a dispute with the three credit bureaus and the provider that reported them.
2. Pay your bills on time to keep your balances low
Paying your bills on time is exactly what lenders want to see on your credit report. If you can successfully continue to make on-time payments, not only will you avoid late fees and black marks, but your credit report will also reflect that you can successfully manage your finances.
To show lenders you’re a responsible borrower, only carry a balance with a credit utilization ratio of 30% or less. For example, if your credit limit is $1,000, keep your balance below $300 — which is 30% of your limit.
3. Consolidate your debt
Debt consolidation means rolling your various debts into one monthly payment. Debt consolidation using a loan can streamline your payments from credit card accounts and other loans to possibly lower your payment, and help you save on fees and interest.
4. Use a credit monitoring service
Some credit reporting bureaus, like Experian, offer monitoring services that’ll notify you any time there’s a change in your credit score and information in your report. These services could be helpful in staying on top of your overall financial well-being.
5. Maintain an active credit account to build your credit history
Lenders want to see a proven borrowing and repayment track record. This means you need to have credit accounts open and keep them in good standing.
Also, having only new accounts will result in a lower score because the length of your credit history will be nonexistent — so don’t close out old accounts. Lenders want to see a long history of healthy credit management in your report.
If your credit is new, start building your borrowing history by opening a mobile phone plan or an Internet account in your name. Gas and other utility accounts also factor in, as do store credit cards.
6. Avoid negative listings, including too many hard credit inquiries
Fully repay your debts to avoid the long-term effects of payment default — which can linger on your credit report for up to seven years. More severe marks include court judgments that can also be listed for up to seven years, and bankruptcies, which potential lenders can see for up to a decade.
Every time you apply for a credit card or loan, it’s listed on your credit report as a hard credit inquiry and pulls down your score. Wait about six months between credit applications, and limit which cards you apply for to take advantage of products that make sense for your financial situation.
7. Add a credit-builder account
Establish credit or improve your credit score with a credit-building loan. Instead of getting access to funds up front, this type of loan requires you to make monthly payments until the loan is paid in full, at which point you have access to the money.
8. Correct late payments and collection accounts
Let’s say you have one delinquency with a credit provider. They may remove that black mark from your credit report if your account was in good standing and you have a legit excuse as to why you missed that payment.
Sometimes a collection agency is even willing to remove a collections account from your credit report if you pay the debt in full. While some agencies will refuse, it doesn’t hurt to try.
9. Hire a credit repair specialist
Credit repair professionals have the knowledge and will work with you to rid your credit report of errors and make disputes on your behalf to get your credit score where it needs to be. Only consider this option if you feel you won’t be able to manage your debts by yourself.
Must read: Can I improve my credit score by 100 points?
If you have poor or fair credit, it’ll be much easier for you to boost your score by 100 points — compared to someone with a score of 700 — because you have more room to improve. As your score gets higher, upward credit mobility gets harder.
Three ways for someone with lackluster credit to increase their score by 100 points include:
- Stay focused on payments. Make sure all accounts are paid to date and keep paying on time and in full each month. Once you catch up on payments, set up an autopay so you never miss another one again.
- Monitor your credit report. Scan each of your credit reports at least once a year, challenge information that looks erroneous and make sure any accounts that should have fallen off your report with time have disappeared.
- Don’t abuse your credit limit. Keep your credit utilization ratio less than 30%. To keep your ratio low, ask for a credit limit increase, make payments twice a month or even move some debt with a balance transfer credit card.
WATCH: How to build a PERFECT credit score
What factors impact my score?
Even though credit scores are calculated differently depending on the reporting agency, these are the major factors that can determine your overall credit score:
- Your payment history. Whether you’ve paid past and current credit accounts on time and in full.
- Your credit utilization ratio. Experts advise carrying a balance with a utilization of 30% or less. For example, if your credit limit is $1,000, keep your balance below $300, which is 30% of your limit.
- The age of your credit history. A credit report with credit accounts open for a long time can improve your score.
- Types of credit. You want to show that you can successfully manage a healthy mix of revolving credit and installment credit.
- The number of listed credit inquiries. Too many applications for credit could signal that you’re under financial pressure and lower your score.
- Liens and other judgments. Negative behavior in the past is an indicator of increased risk and could decrease your credit score.
Why is your credit score important?
Financial institutions use your credit score and the information in your credit report to decide if you’re a reliable borrower. The better your score, the more likely you are to be approved and offered better rates and terms.
Not knowing your credit score or how to improve it can cost you thousands in the long run. For example, on a $200,000 mortgage, someone with a 620 credit score pays, on average, $65,000 more in interest over the loan’s lifetime than someone with a 760 credit score, according to Informa Research Services.
When you know what your credit score is, you have a clearer idea of what types of credit to apply for and your chances of approval.
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How long will it take to see changes in my credit score?
Credit scores typically update at least once a month. However, there is no set day or time for lenders to report changes to your credit report, and how quickly your score changes depends on your credit activity and specific type of debt.
For example, paying off a credit card often impacts your score within one billing cycle. However, if your credit card is past due, late payments remain on your report for up to seven years. New accounts, like a mortgage or car loan, can take a few months before they appear on your report.
If you have an established credit history and are clearing up old debts or erroneous information, your score could change by several points within a few months. But if you are new to building your credit, it can take a few years to establish your credit history and improve your score into the “good” range or higher.
What do I do if creditors make erroneous listings on my credit report?
Order your credit report annually and examine it for errors that can affect your ability to be approved for a loan, credit card or other credit. If you discover any errors, dispute them with the three credit bureaus and the provider that reported them.
If you need help, a credit repair company can review your credit report for common mistakes and contact creditors on your behalf to have the erroneous information removed.
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