A good credit score can save you a lot of money when it’s time to apply for a loan. Whether you need a mortgage, student loan or personal loan, your score will impact how much you pay in interest. Plus, a high credit score can make it easier to find an apartment, get insurance, and qualify for some of the best credit cards.
Read on to discover some strategies that can help you raise your credit score and improve your financial situation.
Summary
How to Raise Your Credit Score
The two main credit scoring models are the Fair Isaac Corporation (FICO) score and VantageScore. Most lenders use the FICO model, while VantageScores are often offered to consumers for free through credit monitoring services. However, both scoring models evaluate similar financial factors and use a numeric range between 300 and 850.
Your credit score is extremely important because it can determine whether you are approved for a loan or credit card and the type of rates you will get. Lenders will offer the best rates and terms to consumers with high credit scores; conversely, borrowers with poor credit scores will have difficulty getting approved or pay much higher interest rates.
Here are some steps you can take to raise your credit score:
1. Pay your bills on time
Payment history is the most influential factor on your credit score. From a creditor’s perspective, an established history of on-time payments is a good indicator that you will handle future debts responsibly. This makes paying your bills by the due date the best way to improve your credit score.
If you have had a history of late payments, the best thing to do is to make timely payments now and wait for the late payments to be eliminated from your report. Late payments and defaults such as collections, repossessions, foreclosures and settlements remain on your report for seven years, and bankruptcies for no more than 10.
However, if some of these reported payments are incorrect or unfairly reported, you can also dispute them with the credit bureaus or contact one of the best credit repair companies to handle it for you.
2. Keep your credit utilization rate low
Your credit utilization ratio is a percentage that represents how much available credit you are using. You can calculate this by dividing your credit card balance by your total credit limits. For example, if you have two cards each with a $5,000 limit and you owe $500 on each of them, your credit utilization ratio would be $1,000 divided by $10,000, or 10%.
Many experts recommend keeping your utilization rate below 30%. Former FICO and Equifax credit expert John Ulzheimer says you should aim for 10% or less if possible. “The higher the ratio, the fewer points you will earn in that category and your scores will absolutely suffer,” he says. “In fact, people who have the highest average FICO scores have 7% utilization.”
The date your credit card provider reports to the credit bureaus can also affect your utilization rate. Ulzheimer points out that FICO’s scoring systems do not distinguish between those who pay in full each month and those who maintain a balance. Your utilization rate at the time the issuer reports to the credit bureaus is what is used for your score.
3. Leave old accounts open
While many people’s first instinct is to cancel credit cards so as to eliminate the temptation to use them, it’s important to note that closing old credit card accounts can actually lower your score.
Closing a credit card, even if you don’t use it, reduces your overall available credit limit. This consequently increases your credit utilization ratio and can lower your score, especially if you have balances on other cards.
Also, it’s best to keep a card open if you’ve paid it off on time. Your records can actually help your credit score by showing lenders that you have a history of managing debt responsibly.
“A bill paid in full is a good thing; however, closing an account is not something consumers should automatically do in the hopes that it will have a positive impact on their credit score,” says Nancy Bistritz-Balkan, vice president of communications and consumer education at Equifax. “Have a accounts with a long history and strong track record of paying bills on time, every time, are the type of responsible habits that lenders and creditors look for.”
4. Apply for credit only when absolutely necessary
Every time you apply for a new line of credit, the lender runs a thorough investigation of your credit report. Such credit inquiries temporarily lower your score. With that in mind, applying for a new credit card just to see if it gets approved or because you received a pre-qualified offer is not a good idea.
A single credit check may only slightly impact your credit score. However, a series of difficult questions could signal to lenders that you are facing financial difficulties or are taking on too much debt. The effects of a large credit increase on your score, according to a TransUnion representative, can last up to 12 months.
If you need to apply for a new line of credit, improve your chances of approval by comparing the lender’s requirements before applying. If possible, get prequalified, as in many cases this results in a soft rather than a hard credit draw. Soft pulls do not affect your credit score.
When shopping for a mortgage, auto loan or personal loan, keep tough questions to a minimum by comparing interest rates over a short period of time. Requests for the same type of loan within approximately a 14-day period appear on your report only as a single hard request.
5. Consider a secured credit card
If you have a short credit history, a secured credit card can help you establish credit for the first time or improve a bad credit score if used responsibly. Credit card companies have lenient requirements for secured cards since borrowers must provide a cash deposit as collateral.
Secured cards may charge an annual fee, and their interest rates are often higher than traditional credit cards. However, if you pay off your balance in full each month, you will avoid accruing interest and establish a record of timely payment.
6. Monitor your credit score
Tracking fluctuations in your score every few months can help you understand how well you’re managing your credit and whether you should make changes. You can check your credit score as often as you want since it results in a soft inquiry, which doesn’t lower your score like hard inquiries do.
Some financial institutions provide a free credit score through your online account or with your monthly statement. You can also use a credit monitoring service. These services simplify the process by sending an alert if your score changes and usually report recent actions that may have caused the change.
Keep in mind that credit monitoring services usually include the VantageScore, which is not commonly used by lenders. However, checking your credit score is still a helpful financial practice that may even alert you to possible identity theft.
7. Seek professional credit counseling
A professional credit counselor can evaluate your financial situation and offer advice on how to improve your credit score. They often work for nonprofit credit counseling agencies and can provide free financial training and seminars.
When you meet with a credit counselor, they will review your credit history with you and determine what factors are hurting your credit and how to fix it. They may also recommend a budget or debt management plan to prevent defaults or bankruptcies.
Improve your credit score FAQs
Why is a good credit score important?
A good credit score can help you secure better interest rates and improve your chances of approval when applying for a mortgage, auto loan or credit card. It could also help you get a lower premium on insurance policies, and since many landlords now run credit checks as part of the rental application process, it can also increase your chances of being approved for a rental property.
How is your credit score calculated?
There are several credit scoring models, but they consider similar factors, including credit mix, recent credit applications, length of credit history, payment history, existing debt levels, and utilization rate (or ratio). of credit.
Each model weights each factor differently. However, they usually place more importance on payment history and credit utilization.
How long does it take to rebuild credit?
The time it takes to rebuild your credit score depends on what lowered it in the first place. If closing a credit card account has affected your score, it may only take a few months to see an improvement. However, if you have filed for bankruptcy or sent accounts into collections, it can take years to recover, and the negative item can remain on your credit report for between seven and 10 years.
How often should I check my credit score?
How often you should check your credit score depends on your goals. Most experts recommend checking your credit score annually if you aren’t applying for new lines of credit or aren’t too concerned about changes. Otherwise, you might consider checking it monthly to track how your financial decisions are affecting your score.