Tips to Improve Your Credit Score
Are you getting ready to apply for a mortgage loan and want to ensure you qualify for the best rates? Perhaps you want to make sure you are eligible for the best credit cards. Either way, you’ll want to start by improving your credit score.
There are several factors used to calculate your credit score, including:
- Amounts owed
- Payment history
- Length of credit history
It’s important to note that though there are no “quick fixes” for a low score, there are a few things you can do to move in the right direction. Below, we’ll outline 6 steps you can take to start improving your credit score today.
6 Steps to Improving Your Credit Score
Check the Accuracy of Your Credit Reports
Three primary credit reporting agencies, Equifax, Experian, and TransUnion, gather your information from companies where you have open accounts. This includes:
- Credit cards
- Auto loans
While they do strive to collect accurate info, this isn’t always the case. In one FTC study, it was discovered that 26% of consumers have potential errors on at least one of their credit reports.
Therefore, the first step in improving your credit score is to make sure that the accounts and negative marks on your credit report are yours. Federal law requires that credit agencies allow you to access your credit report once every 12 months for free.
Request your reports and ensure accuracy. If you find something inaccurate, file a dispute with the agency as well as the bank/lender.
Understand Risk Factors
When requesting your free credit reports, you will only receive the report- you won’t see your credit score. That being said, you can purchase full credit reports if you are interested in seeing a significant increase in your score.
When you purchase your credit report, you’ll also receive a list of risk factors. There are up to 300 risk factors used to determine your credit score and knowing them will help you see what improvements you can make.
Your risk factors may include a specific account that is hurting your credit score. On the other hand, maybe you have too many credit applications within a short time. In some cases, not having a mortgage can be a risk factor. While you won’t be able to fix everything, there may be some that you can change.
Always Make On-Time Payments
If there’s one thing you can do that will improve your credit score, it would be always making on-time payments. Your payment history is 35% of your credit score. Even if you have a high score, being late by 30 days on one payment could cause your score to drop 90 to 110 points. If you are more than 30 days late, the impact could be even greater.
Late/delinquent payments will remain on your credit report for 7 years. The impact will decline over time, but the negative mark is still there. If you have missed payments on your credit report or you want to avoid the risk, put all bills on auto-pay or set up payment reminders.
Manage Credit Utilization
The credit agencies don’t have access to your DTI (debt to income) ratio, so they use a factor known as “credit utilization”. This is 30% of your credit score and reflects the amount of debt outstanding on all of your accounts about your available credit.
For example, if you have a credit card with a $10,000 limit and a $4,000 balance, you have a 40% utilization. Ideally, you should keep credit utilization below 30%, but those with a 10% or less utilization rate have higher credit scores.
There is a catch- balances are typically reported before the due date. Therefore, even if you do pay in full every month, your credit report shows a higher utilization rate. You can control this by:
Paying down revolving credit, focusing on cards/lines that are reaching their limit
Request an increase in credit line if you’re a good customer with a good payment history
Make more than one payment in a billing cycle when possible
Get a Credit Card
When used wisely, a credit card is one of the best ways to improve your credit score- but if used irresponsibly, it can hurt your score.
By getting a credit card and making on-time payments, you show positive payment history and if you keep spending low, you show a low utilization ratio. A credit card will also have a positive impact on the credit mix and new account aspect of your credit score.
If you’re worried about spending too much on a credit card, find one with no annual fee and only use it for a couple of recurring expenses. Set those expenses to autopay and put the card away. Then, you don’t have to worry about racking up a big bill or missing a payment. However, you will be quickly improving your credit history and score.
Do All Shopping at Once
A hard credit inquiry has a short-term negative impact on your credit score. However, the agencies do make accommodations for responsible shoppers who are trying to evaluate their options.
If you’re shopping for an auto loan, mortgage, or student loan, keep everything within 30 days. This way, the inquiry made by one lender doesn’t reduce your score for the next lender. FICO ignores inquiries made 30 days before scoring but some older models use a 14-day window. Therefore, the tighter your shopping window, the better.
Change Takes Time
While it’s true that paying down credit cards and disputing errors can give your credit score a short-term boost, it takes time to improve your credit score. The agencies want to see consistent, responsible behavior for some time before they will significantly change your score.
Therefore, keep an eye on your reports, pay all bills on time, and make an effort to pay down revolving lines. It will take time, but it will be worth it. If you need help creating an action plan to improve your credit score, contact Gipson Commercial Solutions.