Credit can be a great financial tool - when it’s utilized correctly. A less-than-desirable credit score can affect many areas of your life, from job opportunities to loan approvals.
While it might seem like a painstaking process, it is possible to raise your credit score, and in a reasonable amount of time no less. Scores can range from 300 (poor) to 850 (excellent). Here’s a handful of tips to get your score up and, most importantly, keep it up!
Pay Every Bill on Time
The first and perhaps most obvious thing you can do to raise your credit score is to pay every single bill on time. This will not only boost your score, but show future lenders that you borrow responsibly, thus making you more likely to get approved for credit in the future. Also, while paying the minimum is better than not paying at all, it boosts your score even more to pay your balances or monthly expenses in full.
Payment history is the most important factor in your credit score, accounting for 35% of your overall score. A single late payment can harm your credit score, but paying your bills on time consistently can help improve it over time.
In addition to improving your credit score, paying your bills on time can see these benefits:
Lower interest rates
When you have an improved credit score, you are more likely to qualify for lower interest rates on loans. Lower interest rates can save you a lot of money over the life of the loan, depending on the loan terms you can get.
Access to more credit products
With a better credit score, you may be able to qualify for more credit products, such as better auto loans, personal loans from your bank, and mortgages, which can give you more financial flexibility.
Peace of mind.
Knowing that your bills are paid on time and that your credit score is improving can give you peace of mind about the future. In case you need something in a pinch, a better standing for your loans can help you achieve your immediate or long-term goals.
Examine Your Credit Utilization Rate
The next tip pertains to your credit utilization rate. Credit utilization is typically expressed as a percentage and can be found by dividing the credit you’re using (amount owed) by the amount available to you (your credit limit). So, what should your utilization rate be? Experts say anything below 30% is good, but 1-10% is best.
This can be achieved by either spending less on credit than what you currently spend or by raising your credit limit and keeping your spending the same. Put simply:
- Pay down your debt
Paying down your debt is the best way to reduce your credit utilization ratio. Less debt will free up more available credit and lower your ratio. Even paying a little bit at a time can impact your credit score over time. Credit utilization, especially the amount of debt you owe, accounts for 30% of your credit score.
- Only charge what you can afford to pay off each month
Only putting what you can afford to pay off on your charge card helps you on two fronts. First, you can pay off your bill on time. Second, it will keep your credit utilization lower. You could even develop an entire strategy for raising your credit score by simply making a credit card purchase once a month and then paying it off completely. You could start by spending just $50 every month and then paying it off promptly to show the credit agencies you can handle making monthly payments.
- Request a credit limit increase
If you have a good credit history, you can request a credit limit increase from your credit card issuer. Increasing your credit limit will increase your available credit and lower your credit utilization ratio. Just make sure you follow tip #2: paying off your credit card bill every month. And remember, just because you have a higher credit limit doesn't mean your spending needs to increase.
- Keep unused credit accounts open
Even if you don't use your unused credit accounts, it is vital to keep them open. Open credit accounts will help to increase your overall credit history and lower your credit utilization ratio. Length of credit history makes up 15% of your credit score. Keeping a credit account open shows you have a longer credit history and credit activity.
Get Your Annual Free Credit Report
Finally, a good way to gauge your progress is to check on your score regularly. There are several free sites and apps you can use to see an estimated score, and the three main credit reporting agencies – Experian, Equifax, and TransUnion – are all required by law to provide you a free credit report once a year.
Pro tip: Checking your reports regularly allows you to check for any errors and see what is contributing to your current score. Make sure you dispute any errors with the credit bureau as soon as you notice them.
With just a little planning and persistence you’ll see your score creep up in no time.
OMB and its affiliates do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decision.
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