If you currently have a low credit score, you’ve probably been told to devote some time and energy to improving it. But why? The answer is simple: because your credit score is extremely important. Your credit score can be a determining factor in how easy or expensive it is for you to borrow money down the road. A less-than-favorable credit history can make it more difficult for you to be approved for loans, credit cards, apartments, and in some cases even jobs. And if a low credit score doesn’t prevent you from borrowing money altogether, it could result in you having to pay higher interest rates, or limiting the amount you can borrow.
The good news is that your credit score and credit history are not set in stone. There are many things you can do to help improve your credit. Let’s take a look at some specific things you can do to increase your credit score:
- Pay Your Bills on Time. One of the simplest and most effective ways to build a healthy credit score is to pay your bills on time. In fact, your payment history with credit cards and loans makes up 35% of your credit score. Failure to pay other bills such as medical bills, utilities, and government bills can also harm your credit if they are sent to collections. You should always aim to pay your bills on or before their due date. Setting up automatic payments is an easy way to avoid missed payments, and setting up an emergency fund can help to ensure you always have money on hand to pay unexpected bills.
- Keep Your Credit Card Balances Low. Your credit utilization ratio is the amount of credit you are currently using compared to your credit limit. Credit utilization is a major factor in determining your credit health, accounting for 30% of your credit score. A high credit utilization ratio can signal risk to lenders. Experts generally advise that you use less than 30% of the credit available to you. This shows lenders that you’re not overly reliant on credit cards. Some easy ways to help lower your credit utilization include asking for a higher credit limit, paying off your credit card balance multiple times per month, and keeping older credit card accounts active, even if you don’t use them frequently.
- Ensure You Have Different Types of Credit. Having different types of credit can positively affect your credit score. Ideally, you should have a mix of revolving credit, such as credit cards, and installment credit, such as auto loans or mortgages. Having a variety of credit accounts in good standing demonstrates your ability to handle different kinds of debt. So, if you primarily have credit cards on your credit report, you might consider taking out a car loan, or a personal loan to help diversify your credit types. Likewise, if you only have loans on your credit report, you might consider getting a credit card.
- Avoid Opening Unnecessary Accounts or Closing Existing Ones. If you already have a good mix of revolving and installment credit, you should think twice before applying for or opening a new credit account. Obviously, if you need to finance a car or home you’re going to need to apply for a loan, but it’s important to understand the impact that new accounts and credit inquiries have on your credit score. Your length of credit history accounts for 15% of your credit score and includes the age of your oldest account, the age of your newest account, and the average age of all of your accounts. So, opening a new credit account or closing one that you already have, can reduce the length of your credit history and can negatively impact your credit score. Another thing that factors into your credit score are hard inquiries. A hard credit inquiry typically occurs when a potential lender checks your credit, and each one can temporarily lower your credit score. For this reason, you should refrain from having your credit pulled by multiple lenders in a short time period, especially if you’re looking to be approved for a loan or credit card in the near future. Instead, determine your desired lender and apply for an account with them before filling out any other credit applications.
- Regularly Review Your Credit Report for Errors. It’s very possible for inaccuracies on your credit report to drag down your score, especially if your identity has been stolen. For this reason, it’s extremely important to check your credit report on a regular basis. There are three major credit bureaus – Experian, Equifax, and Transunion – and you are entitled to a free credit report from each of them weekly. This allows you to regularly review your credit history throughout the year, and dispute any errors as you find them. You can visit AnnualCreditReport.com to request your free weekly online credit reports.
- Pay Off Outstanding Debt. Because outstanding debt directly impacts your credit utilization ratio, paying off credit cards and loans can help to increase your credit score. If you’re looking to tackle existing debt, you should focus on the accounts with the highest interest rates first. Some banks, such as Bank5 Connect, offer debt consolidation credit cards with 0% introductory rates for a specified number of billing cycles. Transferring high-interest debt to these types of credit cards can allow you to pay down your debt faster, without continuing to accumulate high interest charges.
- Consider a Credit Builder Loan or Secured Credit Card. If your credit history is currently non-existent, most of the before-mentioned tips won’t be of much use to you. That’s where a credit builder loan or a secured credit card can potentially help. These forms of credit allow you to establish a history of on-time payments by essentially borrowing money from yourself. With a credit builder loan, you typically make a payment each month, and the lender places the funds in a bank account. You then receive the funds back (usually minus any fees or interest charges) once you’re finished making the agreed-upon number of payments. Each of your on-time payments counts towards your credit score, helping you to build credit responsibly. With a secured credit card, you typically provide the lender with a deposit that is used as your available credit. You then can borrow against that deposit, with your on-time repayments added to your credit history. Many financial institutions, such as Bank5 Connect, offer secured credit cards.
Your credit score is essentially a key to accessing the financing you’ll need to reach your personal financial goals. Without a strong credit history, you’re likely to face major obstacles when it comes to borrowing money. Increasing your credit score takes effort and time, but it will help pave the way for a brighter financial future.