Tips on the Best Way to Increase Your Credit Score
Your credit score is a three-digit number that a lender uses to help decide the likelihood that they will be repaid on time and it is used if you are going to get a loan or credit card. This means your credit score is an important factor in your financial life and you should aim to get a great credit score. The higher your score, the better chances you will have to qualify for credit cards and loans along with more favorable terms.
If your credit score and credit history aren’t where you want them to be, don’t worry because you aren’t alone. If you are looking to increase your credit score, you should know that it does take time but the sooner you look at the issues that could be dragging it down, the faster your credit score will go up. There are several steps you can take to increase your score, including establishing a record of paying your bills on time and paying down debt.
How Is Your Credit Score Calculated?
A credit score is calculated by using a mathematical algorithm and applying it to the information in one of the three credit reports. A FICO credit score is one of the most popular. It’s possible that you could have dozens of credit scores because there isn’t one uniform algorithm used by all lenders and financial companies to calculate the score.
Some credit score models are common, such as the FICO score. You don’t really have to worry about having multiple scores because the factors that make up your scores are similar. Many of the scoring models will take into account your payment history on credit cards and loans, how much revolving credit you are regularly using, how long your accounts have been open, and the types of accounts you have.
Ways to Increase Your Credit Score
In order to improve your credit score, you need to first figure out what it is. You can check your score online. When you get a score, you will also have access to information about which factors are affecting your score the most.
These factors can help you know which changes to make to increase your credit score. There are certain factors that are typically more important than others. Payment history is one of the most important factors when you want to increase your credit score.
Pay Bills on Time
When lenders look at your credit report, they are interested in how reliable you are when paying bills. Payment performance is considered a predictor of how you will pay in the future. You can influence the credit score by paying bills on time each month. Paying late can have a negative impact on your credit score. You need to pay all bills on time, not just your loans and credit cards. This includes your student loans, rent, utilities, phone bill, and other bills.
You should use resources that are available to you, such as calendar reminders or automatic payments, to make sure that you pay every month on time. If you are currently behind on any payments then you should work to make them current as soon as you can. Missed or late payments appear on your credit report for up to seven years but the impact it has on your credit score declines over time. Late payments that are older have less of an effect than more recent ones.
Pay Off Debt to Keep Balances Low
Since credit utilization ratio is an important factor in your credit score calculation, you need to start paying down debt. Your credit utilization ratio is considered by adding all the credit card balances you have and dividing the amount by the total credit limit. You can figure this out yourself. Look at all your statements from the past year. Add statement balances each month across cards and then divide by 12. This is how much you are using on average each month.
A lender ideally wants to see a ratio of 30% or less and those with the best credit scores have low credit utilization ratios. This means that you haven’t maxed out your cards and you know how to manage your credit well. In order to work on improving your credit utilization ratio, you can pay off debt or become an authorized user on another person’s account if they currently use their credit responsibly.
Apply for New Credit Only as Needed
You don’t want to open new accounts just so that you have a better credit mix. This won’t really improve your credit score. Extra credit can hurt your credit score in different ways, from having too many hard inquires to causing you to overspend and get more debt.
Don’t Close Your Unused Credit Cards
Even though you aren’t supposed to be using your credit cards and paying down your debt, you don’t want to close your credit cards completely. The only caveat is if they are costing you money in annual fees. Closing an account may increase your credit utilization ratio. When you owe the same amount but with fewer accounts, this can lower your credit score.
Don’t Apply for Too Much Credit at Once
Opening a new credit account will increase your credit limit but when you apply for a new card, it creates a hard inquiry on the report. Too many hard inquires can negatively affect the score, even though this will also fade over time. A hard inquiry can remain on your report for up to two years. If you are loan shopping, you can apply for different loans within a certain period of time without it affecting your score too much.
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Dispute Any Inaccuracies on Your Credit Reports
You should be regularly checking your credit reports. Incorrect information on your report may be dragging down your scores. Verify that the accounts listed on your reports are actually yours. If you see errors then be sure to dispute the information and get it corrected as soon as you can.
Dispute Any Inaccuracies on Your Credit Reports
You should be regularly checking your credit reports. Incorrect information on your report may be dragging down your scores. Verify that the accounts listed on your reports are actually yours. If you see errors then be sure to dispute the information and get it corrected as soon as you can.
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See if You Can Increase Your Credit Limits
If you have trouble staying below the 30% credit utilization for best practices then you may want to research to see if you can get your credit limit increased. If you have a good payment history and have increased your score since you first opened the account then your credit company can increase your maximum limit. This will improve your credit utilization quickly and help increase your score.
How Long Does It Take to Increase Your Credit Score?
Time is going to be the most important factor when it comes to increasing your credit score. If you have late payments, make sure you pay your bills and wait. The length of time it takes for you to rebuild your credit history after anything negative is going to depend on the reason behind the decline. Many negative changes in credit scores are due to adding a negative element to your credit report, such as a collection account or delinquency.
The new elements will continue to affect the score until a certain time period has passed. Delinquencies can remain on your report for seven years. Inquiries will remain on your report for two years. Many public record items are on your credit report for seven years but bankruptcies can remain for 10 years. If you want to increase your credit score, you need to know there are no shortcuts.
Establishing Your Credit Score
If you don’t have a credit score then you need to establish one before you can look into the best ways to increase your credit score. Building credit is important because if you don’t have a credit history, it can be hard to get a credit card or loan or even an apartment. There are several tools that can help you begin growing your credit history.
If you want to start with a credit card then you can begin by getting a co-signed card or a secured credit card. You can also ask to be added as an authorized user on someone else’s card. If you want to help build your credit without having a credit card then you want to look into a credit builder loan, or other similar loans. There are also some ways that you can use your phone, rent, or utility payments to build credit.
This can be the best way to build your credit from scratch. This type of card is backed by cash deposits you make upfront. The deposit will usually be the same as your credit limit. You are able to use this card like any other credit card. Buy what you need then make your payment. If you don’t pay your balance in full then you will have an interest. You get your deposit back after you close the account. These cards aren't designed to be used forever. The purpose is to build enough credit so you can get a regular credit card.
A secured loan or credit builder loan helps you build your credit. This type of loan can be a forced savings program and the money you are borrowing is held until you pay back the loan.
It’s possible to get an unsecured credit card or loan if you use a co-signer. Be sure that the co-signer knows that he or she is on the hook for the full amount if you don’t pay. This should be someone you trust and who trusts you.
A significant other or family member may let you be added as an authorized user. By doing this, your family member’s card payment history is added to your credit file. This means you want the primary user to have a long history of paying on time. This way, you can reduce the time it takes for you to get a credit score. You don’t have to use the card during this time in order to get the benefits of being an authorized user.
Before you go this route, ask the primary cardholder to find out whether the card issuer reports the authorized user's activity to the credit bureau. The activity is usually reported but you want to make sure, otherwise, the efforts are wasted. Be sure to come to an agreement with the user if you plan on using the card.
Rent reporting services can take bills you are already paying and add them to your credit report to help you build a history of on-time payments. Not every credit score will actually take these payments into account but some do and this could be enough to get a credit card or loan that will establish your credit history for your lenders.
Checking Your Credit Report and Scores
Your credit report is a record of how you have used your credit in the past. Your scores are then used to predict how you handle credit in the future using the information that is found in your credit report. This means you want to monitor both to watch for errors and to see if your credit building and score increasing efforts are working.
There are several websites that will offer a free credit score. You should look for a website that can offer you a free credit report along with tools on how to improve your score, such as a credit score simulator. There are different credit card issuers that will also print your FICO score on your monthly statement and allow for online access as well. Some card issuers even offer free scores to anyone, whether you are a cardholder or not. You can request an annual credit report and check for discrepancies and errors. Dispute any errors so that you know what is lowering your score.
How Change Affects Scores
A common question when you learn to increase your credit score is how any specific actions will affect your credit score. For example, if you close two of your accounts does it improve your credit score? This question can seem easy to answer but there are different factors to consider. Credit scores are based on the information found on your individual credit report and any change to the report can affect your score.
If you simply just close two accounts, it not only lowers the number of revolving accounts but then it will also decrease the total amount of available credit. This means you will have a higher utilization rate, which usually means a lower score. Just one change can affect many different items on a credit report. Therefore, it’s almost impossible to provide an accurate assessment of how one specific action can affect your credit score.
This is why the risk factors that are provided with your score are important for understanding how to increase your credit score. These factors identify the elements of your credit history that are going to have the biggest impact so that you are able to take the appropriate action.
What You Don’t Know about Credit Scores
There are a lot of complex calculations involved in credit scoring so the more you know about your score and report will allow you to increase your credit score. If you know the most important factors in a credit score, it can be helpful to know a few other factors about scores and reports.
Negative Information on Your Credit Report Lowers Your Score
The information will remain on your report for a certain period of time. A late payment appears for seven years from the date you miss the payment. When you pay off a collection account, it doesn’t immediately remove it from the credit score. At some point, all negative information will fall off your credit report. Until this information does fall off, you can increase your credit score by paying bills on time and tackling things you can influence.
No Need for a Monthly Credit Card Balance
You don’t need to have a monthly credit card balance in order for you to build credit history. In fact, you can pay off your credit card bill every month and still have a positive effect on your credit standing.
If You Settle an Account for Less than You Owe, It Can Harm Your Score
Any time you fail to repay the debt you originally agreed to, it could affect your credit. However, the negative impact of a settlement is less than the impact of not paying the debt at all or having to declare bankruptcy.
Finally,
A good credit score can open possibilities and open doors for you. A good credit score can help you get the best interest rates when you borrow money and can influence how much you pay for insurance. Since landlords can consider your credit score when you apply to rent, it can help get you into a better living situation.
Considering how important a credit score can be to your financial well being, it's important to do what you can to increase your credit score in order to make yours as good as possible. Checking your score will be the first step and then you can learn more about the ways to increase your credit score.