5 Ways to Improve Your Credit Score
When applying for any type of credit, Creditors will run a credit check by pulling your credit report and credit score to review how responsible you are as a Borrower. The creditors use the information in your report to determine whether or not to lend to you as a Borrower. The items included in your credit report comprise a credit score that says a lot about you. You want to make sure you are telling the right story. Here are a few ways to help you drive up your credit score as much as possible before you apply for your next credit card, auto loan or debt consolidation loan.
There is a strategy for maintaining a good credit score. But there is no magic strategy; you have to create it on your own and for your own situation. The most important way to get started on this journey is to pull your credit report from all 3 Credit Bureaus (Equifax, Experian, and Trans Union). You qualify for a free credit pull each year. Next, find out your credit score. Look for this using a free tool like CreditKarma.com. Be sure to start your budget and stick to it. At #CTBUniversity learn more about Living on a Budget
The most important rule is to STICK TO YOUR PLAN. Once you create a budget, stick to it. When you create a strategy to improve your credit, stick to it. Make it your plan to fit your situation but whatever you do, stick to it. It won’t happen overnight, but it will happen.
- Think before you close – One of the main factors that creditors review in your credit report is your credit history. Meaning, how long has this potential Borrower had and maintained credit. This factor makes up 15% of your credit score. The longer you have had and maintained credit on your report, the better the benefits. The easiest way to show length in credit history is with a credit card. This is a revolving account that remains open as long as you use the account and maintain a good payment history with the Bank. This is why many creditors advise you not to close out your account when you pay it down. It affects your credit score. When you close out a major account with a long credit history, you could hurt your score.
Always remember, it is good to pay down your debt, however, it is important to know that closing out an account is not always necessary. You can still maintain an account with a good Length of Credit History by making simple purchases and paying those off every month.
- Diversify your portfolio – Another factor that makes up 10% of your credit score are the types of credit you use. It is important to create a mix of accounts on your credit report to show that you can maintain and be responsible for different types of loans. This can include auto loans, installment loans, home mortgage loans, and student loans. It is true that credit cards weigh more heavily on your credit score than other types of loans. This is because credit cards are open-ended credit, meaning you can have a credit card for several years and it will never close unless you do something to close out the account such as requesting the account closure or not making timely payments that cause the Bank to close out your account.
Remember, it is important to maintain open-end and closed-end credit accounts to show a mixture on your credit report. This helps to show your responsibility as a Borrower.
- Be wary of new credit – Sometimes, opening new credit accounts can hurt your credit score. This factor accounts for 10% of your credit score. Inquiries on your credit report and subsequently opening a new account can cause a temporary drop in your credit. If you are looking to buy a new home or car in the near future, you are playing a very dangerous game. This new account can cause you to no longer qualify for the home you wanted to purchase or the car you wanted to buy. Also, if you show a lot of credit inquiries on your report in a short period of time, you could be perceived as a “desperate” Borrower and you are more likely to charge up your card than someone who is typically not looking for credit.
There is a caveat to this rule. It is important to balance the new credit rule with the credit utilization rule. We will dive more into this next.
- Watch the amounts you carry – One of the most important factors that make up your credit score is your credit utilization or the amount of debt you owe vs. the credit you have available. This ratio is important because it makes up 30% of your score! The lower your credit utilization the better. The rule is to keep your utilization right around 30% of your available credit. So if you have a $3,000 available credit, it is best to keep your balance lower than $1,000. This brings up the new credit scenario presented above. If you do open a new account, this could increase your credit utilization ratio though it may slightly decrease your score temporarily, it is better in the long run.
It is important to watch your balance to maintain a low credit utilization ratio as much as possible. Since this factor makes up a good portion of your score, pay attention to the balances you carry. Make sure to pay down your balances as quickly as possible.
- Pay your bills and pay them on time – We cannot stress this enough. Your payment history makes up 35% of your credit score. This is the highest factor in your score so make it count. Most creditors review your past payment history for up to 24 months. So, if you have late payments in the last 2 years, they will show up on your credit report. So be mindful of your monthly payments and when they are due. Normally, creditors report if your payment is more than 30 days late, so be absolutely sure not to ever let your payments be more than 30 days past due. A good way to monitor your bills is to create a budget and include your debt repayments in your budget to make sure you make your payments every month on time. A good rule is to write out all the bills you owe in a month and the date the bill is due. There are several tools on the internet to help you plan your budget. Use these tools and use them wisely.
Budget = Balance. Balance your wages vs. the number of bills you owe. Be sure to pay yourself first, because savings is important. After saving, be sure to pay your bills on time!