Are you looking to create a great credit strategy that will help you to improve your credit score? Check out my guide,15 Best Ways to Improve Your Credit Score. So you want to become a homeowner? Applying for a mortgage is part of the home buying process, and the rates you’d get depend on your credit score. Or is renting a better option for you? Your to-be landlord will likely review your credit profile before agreeing to rent out the unit. Want to buy a car? Lenders will again check your credit score before offering any financing deal. And so do potential employers before they select you for particular jobs.
See how credit impacts your day-to-day living? This is exactly why it matters so much – when your scores are low, it’ll be more difficult for you to get a mortgage, a rental unit, an auto loan and in some cases, even a job. In other words, it’s a kind of a tool that lenders use for assessing risk when issuing out a loan. Higher credit scores imply that risks are lower, and so you get better interest rates, credit card offers, lower premiums and several other benefits. Over the course of time, this results in increased savings. But when your scores are lower, it’s vice versa; lenders perceive the loan to be riskier and so demand higher interest rates, or deny the loan altogether.
Research claims that over 50% of the consumers have a credit score that falls in the Very Poor (300 to 549) or Poor (550 to 649) categories.
Your credit score is impacted by various factors. Take care of a few things, heed onto our advice, and you’ll be able to improve your score. Let’s take a look at what makes up your credit score, and then go through some of the best and most effective ways to improve your score. While some of these methods may be time consuming, others are fairly quick and increase your score in about a month or two, without requiring you to put in extensive efforts.
What makes up your credit score?
Factor Weightage Description
Payment history 35% Late payments have a negative effect on your scores. So always and always pay your bills in a timely manner.
Credit Utilization 30% Lower credit utilization values result in higher scores.
Credit Age 15% Your score is better if you’ve maintained your credit accounts responsibly since opening them.
Credit Diversity 10% If your credit mix is diverse, comprising of different credit
products, your scores can improve.
Number of Inquiries 10% Inquiries can be soft or hard. Soft inquiries include self-checks, employer checks and prequalification offers, and don’t impact your credit score. However, hard inquiries can cause your score to decrease by some points.
What can you do to boost your credit ratings?
1. Pay the full amount timely
Payment history is the biggest contributor to your credit score. Making timely payments for all your accounts significantly improves your score, but the effect is usually observed after a few months.
While you may be enticed to pay the minimum amount required, doing so increases your credit utilization ratio, resulting in lower scores. So try to pay off the full amount, and do so in a timely manner. An alternative way to manage your payments is to pay twice a month rather than the traditional, single monthly payment, so as to lower your credit utilization ratio.
2. Set reminders
Payment history significantly impacts your ratings, so even if you miss a single payment, you quickly damage the score. Late payments appear on your report for seven years; however, their effect on your score is mitigated after about two years. So set up payment reminders before the due dates to ascertain that you always pay on time. And if you still forget to pay, you may be better off with automating payments.
3. Automate payments
An impactful strategy that improves your payment history, but the effect on your credit score is observed after quite a few months. Sometimes, you may miss payments because you don’t have enough funds. In that case, it still may be okay to delay. But if you’re only missing payments because you forget, you should definitely automate them for all your accounts.
According to the research, this reduces chances of a missed payment by almost 70%, and improves your credit score by 27 points. Quite good, isn’t it?
4. Change due dates for your payments
Changing the payment due dates might work in your favor, improving your credit score. Consider a situation where your bill is due by the 8th day of the month, but you don’t receive your pay until the 15th of the month. So when your payment is due, you may not have enough cash. As a solution, talk to your credit provider and see if you can modify your schedule such that the due dates are aligned to the date when you get your salary. Now the cash flows are spaced more appropriately, and you wouldn’t have to miss payments.
5. Pay off your maxed out credit cards first
Generally, you should get rid of the greatest debt first of all. But if improving credit score is on your list of financial aims, you should pay off the debt for the credit card that has either been maxed out or is closer to becoming maxed out. This lowers the value of your credit utilization ratio more quickly, increasing your score.
6. Be careful when paying off an old debt
If you’re paying off an old debt, ensure that it has been charged off. This means that the creditor doesn’t expect any more payments from you. Should you still make one, your debt will be reactivated, showing up on your credit report and lowering your score.
If collection agencies were ever involved for any of your debts, then they may be charged off. So before getting rid of them, do confirm their status from the lender.
7. Check for errors
The Federal Trade Commission claims that around 20% credit reports have errors. Yes, this means that chances of a mistake are quite high. Some of these may include misspelled names or incorrect addresses, but other errors, can affect your score negatively.
The three credit reporting agencies (Experian, Equifax and TransUnion) provide a free credit report once every year. If you haven’t done already, get a copy of your report and check for possible errors. If you notice anything out of place, file for correction right away. Once rectified, your credit score will be boosted quickly.
8. Try to increase credit limit for your current card
How many credit accounts do you currently have? Ask your provider to increase credit limit on them, and your score should increase in about 1 to 2 months – but this works only when you already have a good credit score and don’t overspend.
When you increase the limit for your credit accounts, you are lowering your credit utilization value, which makes up 35% of your overall credit score. So for instance, if your balance is $2,000 and your credit limit is $4,000; your credit utilization ratio is 50%. Now if your credit limit can be increased to $8,000, your utilization value would drop to 25%. In terms of your credit score, this causes a 30 points increase, which is pretty good, considering that it only takes a month.
9. Sign up for a new credit card
Yes, you should have the least number of credit cards if you want to manage them more effectively, but when your scores are not so good, and you want some quick financing, it might be a good idea to apply for a new credit card before talking to any lenders. This also decreases your credit utilization ratio without requiring too many efforts on your part, but just like the above method, it works only when you have a good credit score.
That being said, remember that this strategy is effective only when you can manage additional credit cards quite well. Also keep in mind that when applying for a new credit account, your score may initially drop temporarily by around 5 to 10 point during the sign-up phase. Two months down the road, and it will increase to a value a higher than it was back then.
A bit of advice here: since applying for new credit lines decreases your score initially, you should do this sparingly so that the impact isn’t too significant. Don’t, in any situation, open up too many accounts in a short time period because the effects can be devastating if you’re want to get a loan in the next few months.
10. Apply for a secured credit card
A secured credit card is provided only when you deposit cash as collateral. As with regular cards, you make monthly payments in the same way; what’s different is the fact that the limit is backed by the cash deposit, strengthening your credit profile.
Secured cards are a preferable option if your credit history is poor, and you can’t get approval for traditional credit cards. Upon obtaining them, you can increase your credit score by 63 points on an average over the next 6 months.
11. Avail credit monitoring services
Credit monitoring allows you to track changes in your report and scores in real time or over shorter time periods like a month or so. This helps you in identifying fraudulent activities, which you may not come to know of, unless someone applies for an account or loan on your behalf. However, if you have signed up for a credit monitoring service, you’d get an alert whenever a new account is opened under your name or another similar even takes place. Thus, regular monitoring allows you to take actions quickly and deal with the situation sooner. In terms of numbers, using credit monitoring services can boost your score by 42 points, but if you don’t, your score rises by only 17 points on average during the same period.
12. Become an authorized user
If you already have a poor credit history, you would probably face difficulties in trying to increase your credit limit or when applying for an unsecured card. In such a case, a quick way to build up your score is to become an authorized user, but this you do on someone else’s account, someone who already has a good credit score and history. Thus, you benefit from their higher ratings if that person continues to pay bills timely and maintains a low balance. Likewise, your score will suffer if the primary account holder fails to manage their accounts responsibility. So when making use of this strategy, be very particular about whom you choose as the primary account holder.
13. Keep your old credit accounts open
Even if you aren’t using them because doing so helps your credit score. Credit age, which makes up 15% of your score, measures how well you have been able to maintain your credit accounts ever since you opened them. Lenders review your history to assess if you’ve been doing this responsibly, and are more likely to favor you, if your accounts are older.
So, even if you aren’t using all your credit accounts, you should leave them open and keep revolving them while demonstrating that you can manage your credit effectively. Not to forget that this also helps your credit utilization ratio – more accounts imply a greater limit. If you still want to close accounts, close your newer ones and continue using the older ones.
14. Diversify accounts
As already mentioned, credit mix affects 10% of your overall score. If you can add another element to your current mix like a credit card, student loan, auto loan or even a mortgage, you can improve your score, but only if your payments are timely. The effect becomes noticeable after a few months.
15. Enroll in a debt consolidation plan
Signing up for debt consolidation decreases your credit score, but it is only temporarily. Over time, regular payments and other fixes quickly boost score, especially when you start eliminating your debts one by one.
Follow our blog for more great advice on managing your credit accounts and profile.