Do you know your credit score? It’s that little number between 300 and 850 that determines your worth as a person. No, it doesn’t actually do that. But it is an important number because it does determine your creditworthiness which will totally matter if you need to take out a personal loan or a mortgage. The higher your credit score, the more you will be approved for. Even more importantly, those with the highest credit scores will get the most favorable loan terms.
Let’s discuss some really simple ways to improve or maintain your credit score.
1. Pay your bills on time! A good payment history makes up 35% of your credit score. Paying all of your bills early or on time has the most significant effect on those three little numbers so don’t ever miss payments!
Thankfully, we are in the twenty first century so bill payment has never been easier. Almost all bills (including rent at many complexes) can be paid online. Even better, you can automate these payments for automatic withdrawal on your due date. There is no excuse for paying your bills late. You are an adult, you can surely either memorize a few due dates or automate. If you are really forgetful, the companies can email you with your balance and due date a few days before.
2. Keep your debt-to-credit ratio low. The second most important factor in your credit score is how much you owe. For instance, if you have been granted $5,000 worth of credit, you should not be $4,500 in debt. Try to shoot for 30% or below. So if you have $5,000 worth of credit, keep your balance at less than $1,500.
How do you do this? Well if your credit utilization is over the limit you need to do one of two things (or you can do both!): pay down your debt or raise your credit limits. If you go with the latter, don’t use it as an excuse to rack up more debt — it’s simply a tactic to raise your credit score quickly.
3. Keep credit cards open for long periods of time. So this isn’t a quick AND easy tactic, but it definitely is easy. The length of credit history accounts for 15% of your credit score so keep your cards open and active.
Now obviously, I’m not suggesting you run up a bunch of debt in order to raise your score. Just set up an automatic payment (something small, like a Netflix subscription) on your old unused credit cards. Don’t forget to also set up an automatic payment from your checking account to pay that $8 a month in full. Isn’t technology fun?
The exceptions to this are non-credit card debt and store credit cards. Don’t buy something at a store each month just to keep a card open and don’t continue accruing interest on a car loan or student loan just to keep it open. Paying these loans off may mean a slight hit to your credit score (it’s a flawed system), but it is worth it to save money on interest.
4. Don’t regularly apply for more credit. Credit inquiries make up 10% of your credit score, so keep them low. Examples of credit inquiries include applying for loans and credit cards as well as credit checks for apartment rentals and jobs.
When you are planning on buying a home, don’t apply for any other forms of credit for six months before. Opening several forms of credit within a short period of time lowers your creditworthiness and assumes that you are high risk. This is especially important for people with a limited credit history.
5. Mix it up! The types of credit you have account for 10% of your credit score so keeping a variety can raise your score. Different types of credit to consider are credit cards, retail accounts, personal loans, and mortgage loans.
Word of warning, as this has only a small effect on your credit score, it is not a good idea to run up debt across multiple loans and credit cards just to improve your score. For instance, do not take out a mortgage you are not ready for simply to raise your credit score. While it is an important number, it is not more important than your financial health.
6. Make sure your credit report does not contain errors. Your credit report is even more important than your credit score, as it shows your entire credit history. Unfortunately, credit reports often have errors. You are entitled to one free credit report each year from each of the three credit reporting bureaus. Many people request each report 4 months apart, allowing them to check reports three times a year.
When you hear the words “free”, “credit”, and “report”, I know what website you are thinking of. Don’t use that one! Go to www.annualcreditreport.com. It is the only totally free and totally legitimate credit report site.
Check over each of your three reports to make sure errors do not exist. Any errors can hurt your credit score and make you seem unworthy of credit to lenders.
None of these methods should be used at the detriment of your financial health. If you cannot responsibly handle multiple (or any) credit lines without going deep into debt, then don’t. It is not worth it to hurt your day-to-day finances just to raise a fairly arbitrary number. Yes, it is an important number, but it is also a number that can only be raised by going into debt. Those who do not have the self-control to pay their credit card bills in full each month should not seek out credit cards in the first place. Not lecturing, I just know this from personal experience.
On that note, prioritize paying down debt, making all payments on time, and checking your report regularly for errors. These three things are easily the most effective ways to raise your credit score while also maintaining good financial health.
Do you know your credit score? How have you worked to improve it?