7 Things You Can Do to Improve Your Credit Score
Your credit score is a three-digit number that represents your creditworthiness. In general, a higher credit score results in better loan terms and better chances of getting approved for a loan in the first place.
Here are some tips on improving your credit score in preparation for your next loan application:
1. Manage your bill payments
As one of the most influential aspects of your FICO Score and VantageScore, it’s crucial that you make on-time payments to your lenders, credit card issuers, and billers if they report them to the credit bureaus.
One of the easiest ways to improve your credit score is by making all of your payments on time — no matter what. Even if you can’t settle your credit card balances and can only make the minimum payment, pay what you can.
Sometimes, this is easier said than done, but there are some simple things that you can incorporate into your bill pay routine to ensure that your payment is heading out the door when it needs to be.
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- Keep a tidy bill pay space, either at a desk or on your computer
- Make a bill pay date, and align your bills with your paychecks if necessary
- Create notifications just before your due date to remind you when your bill is due
- Decide whether automatic payments are the best choice for your financial situation
- Contact your lender or biller if you’re experiencing financial hardship and are unable to make at least the minimum payment
2. Stick to 30% or less credit utilization
Managing how much credit you use at a given time is the second most important factor in your FICO Score. The best way to keep your utilization low is to always pay off as much of your credit card balance as possible — in full is best. While you should always shoot to pay off the minimum amount, more is better.
To reduce your credit utilization rate, you can also make more than one monthly payment. However, if you use more than 30% of your credit limit throughout the month and make small, more frequent payments, you can keep your utilization at an ideal rate when your credit card company reports the information to the credit bureaus.
Another way to lower your utilization is to ask for a credit limit increase. You can usually ask your issuer for a higher credit limit online or over the phone. You typically have to have a positive credit history to get a credit limit increase. Just be sure to keep your additional spending in check, or this will all be for naught.
3. Keep credit accounts open and in good health
While not the most important component of your credit score, the length of your credit history counts for something. For FICO Scores, credit history length accounts for 15% of your score, while VantageScore calls it less influential.
However, the age of your credit history is an easy one to use to your advantage. Essentially, if you have an open credit account that you’re considering closing, you should reconsider. If you close it and it’s one of your oldest accounts, it could bring your score down several points.
Furthermore, closing an account will lower your overall credit limit and increase your credit utilization. If the account is in good standing but one that you don’t use anymore, keep it open and only use it for sporadic, small purchases to keep it in good standing. For instance, charge gas or groceries to your card every once in a while, but don’t forget to pay off your balance at the end of the month.
4. Limit hard inquiries and new credit requests
Try not to open too many accounts at once. Credit applications lead to hard inquiries by creditors, which knock your credit score down a few points.
Sometimes, hard inquiries are inevitable, like when you want to take advantage of a good deal on a credit card. Luckily, new credit will only moderately affect your credit score. Nonetheless, it’s best to limit new credit requests when you can.
This is especially important when you’re looking to apply for a new, large line of credit in the near future. For instance, if a new home is on your horizon and you need to take out a mortgage, you’ll want to keep your credit score as high as possible to have a higher likelihood of getting approved for the loan and securing a good interest rate. That means you should avoid requesting new lines of credit in the months before applying for the mortgage.
5. Make your thin credit file a little thicker
People with thin credit files have few (if any) accounts listed on their credit reports. According to TransUnion, around 37 million Americans have thin credit files. In many cases, you have to have credit to get credit, making it difficult for people with little credit to improve their credit score situation. However, there are things that you can do to kickstart your journey.
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- Apply for a secured credit card, make on-time payments, and manage your credit utilization.
- Become an authorized user on someone else’s credit card.
- Use services, such as utility or cell phone providers, that report your bill payments to the credit bureaus. You’re paying bills anyway — might as well make it count. Make sure you’re paying these bills on time, though.
6. Consider debt consolidation
Debt consolidation is the process of taking out one loan to pay off several loans. For instance, if you have multiple student loans, you could take out a single loan and consolidate all of the student loans under a single umbrella. If you’re able to get a good interest rate on the consolidated loan, you’ll be able to pay down your debt faster, which will improve your credit utilization ratio and boost your credit score.
Similarly, if you have multiple credit card balances, you can do a balance transfer to consolidate all your credit card debt under one card. Many balance transfer credit cards offer an introductory 0% APR, which allows you to pay down your debt faster.
It’s important to be careful with these cards, though. Many balance transfer credit cards have higher-than-average interest rates after the introductory period, so it’s important that you have a plan to pay off your balance quickly.
Also, balance transfers typically come with a fee that costs a certain percentage of the total transfer, usually 3–5%. You may be able to get balance transfer fees waived before you sign your contract but don’t expect it.
7. Review your credit reports
One of the most important things that you can do while trying to improve your credit score is to review your credit reports. You have access to one free credit report per week from each of the three major credit bureaus: Equifax, Experian, and TransUnion. Request your copy at AnnualCreditReport.com.
By reviewing your credit reports, you can get a sense of what you’re doing right when it comes to credit and — just as importantly — what you can be doing better. If you want the highest possible credit score, your credit report should look like on-time payments, low credit card balances, older credit accounts still in use, a diverse array of credit types, and minimal hard inquiries or applications for new credit.
If you find any discrepancies or inaccurate information when checking your own credit report, you can dispute them directly with the credit bureau, and you should see some movement in your credit scores within the next few months.
