Your credit score is the most important three-digit number you need to know. It measures your financial health and tells lenders how responsible you are with your credit. A good credit score can save you thousands of dollars over the course of a lifetime. The higher your score, the more likely you’ll be approved for loans and qualify for lower interest rates.
Thankfully your credit score is not a static number. With a lot of dedication and work, you can improve – and maintain, your score. Here are some ways you can improve your credit score.
Review your credit report
Before you begin to fix your credit, you need to know where you stand. Request a copy of your credit report from each of the major national credit bureaus: Equifax, Experian, and TransUnion. You’re entitled to a free report every 12 months from each company through AnnualCreditReport.com.
First, review your report for accuracy and report any mistakes as soon as possible. Next, check your history and see if there are any habits that are working in your favor or against you. People with higher scores often have a history of timely payments, low credit utilization, minimal inquiries for new credit, and a mix of different credit card and loan accounts. Conversely, a history of late payments, high credit utilization, collections, and judgments negatively impact your score. Identify any deficiencies and make a plan to remedy the situation.
Stay on top of your bills
Paying your debts responsibly and on time works in your favor. Doing so shows lenders you’re responsible with credit; making them feel more comfortable lending money to you. According to FICO and VantageScore, the two most common scoring models, payment history accounts for 35% of your score.
Late payments, defaults, repossessions, foreclosures, and collections have a negative impact on credit scores. Stay on top of your bills, whether through automatic payments or setting up reminders. If you’re behind on payments, contact your creditors to set up a payment plan to stop additional late payments from being added to your history.
Lower your credit utilization rate
Your credit usage is the second most impactful factor in your credit score. Lenders review your credit utilization rate, or ratio, to see how much credit you’re using at any given time.
To calculate this for yourself, simply add up the total amount of credit from credit cards and loans/lines of credit you’re using and divide by the total amount available. Say you have two credit cards with a total credit line of $5,000. If you spend $1,000 across both cards, then your credit utilization rate is 20%.
A good rule of thumb is to keep your credit usage below 30% or less of your total credit limit. This can be accomplished by paying off your credit cards in full each month or making an extra loan payment. If you have a high income, you can also request a credit limit increase however, this only works as long as you don’t also increase your spending.
Apply for new credit sparingly
Whenever you apply for a new credit card or loan, a hard inquiry is made on your credit report, which can temporarily lower your score. Hard inquiries remain on your report for 24 months and may impact your score for the first 12 months. So think twice before opening that store credit card to save money on your purchases. When you’re rebuilding your credit score, these credit dings can slow down your progress.
And don’t worry; checking your credit report does not impact your score!
Reconsider closing old accounts
Resist the urge to close old credit accounts. The longer your credit history is, the better. Closing old accounts will not only lower the average age of your credit but can potentially increase your credit utilization ratio.
When it comes to improving your credit score, there isn’t a quick fix. It can take three to six months before you start to see changes so don’t get discouraged! All the work you put into fixing your credit score is well worth the effort.
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