6 Tips On How To Improve Your Credit Score
Becoming aware of and taking control of your financial situation is empowering.
Problem is, there are so many aspects of personal finance to work on that many get overwhelmed and don’t know where to start. This causes a lot of people to never try in the first place.
One surefire way to start improving your financial situation this instant is to improve your credit score.
But what benefits will you reap from a strong credit score?
Why Do You Need A Good Credit Score?
Credit score is a quantitative way of measuring how risky of a borrower you are. The higher the score, the less risky of a borrower you appear to be. The lower the score, the riskier of a borrower you appear.
A good credit score is vastly important to your financial success in modern society.
First of all, a high credit score makes new debt and large purchases easier to come by. Borrowers are more willing to take a chance on you if you’ve proven your responsibility with debt. You’ll have a much easier time getting a new car, buying your dream home, or snagging a new credit card.
Once you get approved for that new debt, you’ll notice another benefit of a good credit score: low interest rates. Borrowers assume you’re less risky if you have a good score, so they don’t need to charge as much interest to hedge against losses nor dissuade you with high rates.
Other benefits of a good credit score include
- Access to more exclusive credit cards
- More likely to be approved for higher credit limits
With all that in mind, time to learn how to increase your score so you can experience these benefits yourself!
1. First, Make A Habit Of Monitoring Your Score
Ask any successful person what the key to success is and many of them will tell you “habits”. That advice is just as true with your credit score.
The other tactics on this list aren’t very useful if you don’t make a habit of monitoring your score because you can’t track your progress.
Never pay for your credit score. There are tons of free sites that let you look at your credit score in detail as much as you want for free AND without damaging your credit.
2. Pay Your Bills On Time, Every Time
This one’s a no-brainer. The more you pay your bills on time, the more likely you are to keep doing so. Payment history is actually the largest credit score factor at 35% of your score. Also, making timely payments over time builds your credit history length, another important score factor.
Every time that credit card bill comes in, you need to make AT LEAST the minimum payment, although we’d recommend paying off your statement balance each month to avoid interest charges and rising minimum payments.
But not all bills affect credit score the same way. Many bills do not actually report to any of the 3 credit bureaus.
Rent’s a good example. Landlords don’t really report rent payments to the credit bureaus. Your on-time payments don’t raise your score at all. Even a late rent payment here and there doesn’t do anything to drop your score.
It’s when it goes to collections that your credit score takes a hit.
That being said, pay every bill on time, every time. The last thing you want aside from a low credit score is collections at your door. At best, your score goes up. At worst, your score doesn’t decrease.
3. Use Your Credit Less (But Not Never!)
High credit balances will knock your score down more than a few points.
If your credit balance is too high, that tells creditors 2 things:
- Higher balance = more debt to payoff = less likely to pay it off
- Heavy reliance on credit card = financially irresponsible/troubled = less likely to pay it off
Credit bureaus calculate what’s called your credit utilization by dividing the sum total of your credit balance by the sum total of your credit limits. They arrive at a credit utilization ratio.
Many agree that <30% credit utilization is good to shoot for.
But did you know that keeping your balances at 0 isn’t good for your score either?
Seems counter intuitive, but think about it: you can’t prove you’re a responsible debtor if you never take on any debt in the first place!
It won’t directly hurt your credit score, but it won’t improve it either. Your score will be held back from its full potential.
Want to know the easiest way to use some credit but not too much?
Only use your cards on essentials like gas and groceries. Stay away from using credit cards for fun money and you’ll be fine.
4. Ask For A Larger Credit Line
In a similar vein as the previous tip, getting approved for a larger credit limit from your bank will give your score a nice little boost.
Banks will often reach out to loyal customers with excellent payment histories and credit scores and offer to increase their credit limit.
If your bank hasn’t offered to give you an increase, it never hurts to ask. It’s actually not too hard to get a limit increase as long as your credit history is decent. Just be personable and tell them about your loyalty/credit history.
They make money when you spend more money (if you end up owing interest, that is), so their interests are slightly aligned with yours already.
5. Don’t Close Your Old Cards
While we’re on the topic of credit utilization, let’s talk about your old cards and why you should leave them open.
Closing old or barely used cards instantly decreases your total credit limit, but it won’t get rid of your balance. All you’re doing is skyrocketing your credit utilization if you decide to do that.
Instead, do the opposite: Keep cards with small to zero balances open. You’ll end up with a higher total credit limit without putting on much (if any more debt).
Your unused cards will effectively serve as a buffer, giving you a lot more breathing room when it comes to your credit utilization.
6. Refrain From Applying For Too Much Credit
Switching gears, did you know that simple applying for new credit can damage your score? This is known as a “hard” inquiry, as creditors do a formal pull of your credit score and history.
Hard inquiries are not to be confused with “soft” inquiries which don’t hurt your score. Soft inquiries occur when
- You check your own credit
- Lenders check your credit for pre qualification/pre approval offers (wouldn’t be fair to penalize you for inquiries occurring without your permission)
But why do hard inquiries like this hurt your score? Shouldn’t getting more credit help your score? Aren’t you proving financial responsibility if you can handle new debt?
Again, it’s easier to understand why this is if you put yourself in the shoes of a creditor.
Imagine you’re a lender and you get a new card application. The guy who applied also applied for 20 other cards over the past week.
Why would someone send out so many credit applications at once, if not because they needed to take on more debt to get by?
And that’s why hard inquiries hurt your score; people applying for new credit are a little less likely to pay it back, probably because they’re slightly more likely to be depending on debt due to financial irresponsibility (and studies have shown this link).
Don’t fret; hard inquiries hurt your score way less than missing a string of payments, even if you’re still new to credit. As you build your credit history, they matter even less.
Also, each hard inquiry is wiped from your credit score after 2 years, giving you a nifty little bump in score when it happens.
Make That Credit Score Trend Upwards
Credit score is one of the keys to unlocking the good life. A good score puts your dream house and car within reach and saves you thousands on interest payments.
But a good score doesn’t happen overnight. Consistency will win the day.
If your credit score is in the dumps, the best you can do right now is to take each day as it comes, rather than discouraging yourself by looking at the hundreds of points you have left to earn.
Make each payment on time, use your credit cards in moderation, keep your unused cards open, and avoid new credit unless you actually need it.
Before you know it, your credit score will be sky-high.
Just be ready to receive several pre approval offers in the mail each day once you get there!