Regardless of your financial situation, your credit score is an important aspect of your finances. This is especially true if you’re planning to borrow money for any reason. With a better credit score, you could qualify for lower interest rates when you borrow, e.g., home mortgage, car loan, and other types of loans. As such, it’s a good idea to do what you can to improve your credit score.
If you don’t know your score yet, here’s how you can get your credit score for free. It only takes a few minutes to sign up and find out.
How Your Credit Score is Determined
Before you can improve your credit score, you should have a basic understanding of how credit bureaus calculate your credit score. According to myFICO™, five key factors influence your score.
|Payment History. Do you repay your debt on time? Late payments, collections, and bankruptcy are also included here.||35%|
|Credit Utilization. How much money do you owe compared to your credit line?||30%|
|Length of Credit History. How long is your track record? How old is your first credit card?||15%|
|Credit Mix. Do you have different types of loan — e.g., mortgage, car loan, business loan, revolving credit, etc.||10%|
|New Credit. Do you have a lot of applications for credit recently?||10%|
Improving Your Credit Score
The first step to improve your credit score is to check your credit reports. You can check your reports for free at AnnualCreditReport.com. Review your reports carefully. If you see any reporting error, contact the credit bureau to dispute the line item and ask them to correct the mistake.
Next, since you know that factors that affect your credit scores, you can put together guidelines to help you improve your credit.
The general rule of thumb here is to make sure you can afford the payments before you take on a debt, and once you have it, to make all payments on time.
- Make all of your payments on time. The easiest way is to pay as soon as you get the statement or set up automatic bill payments.
- Avoid collections. Before adding new debt, make sure you can pay everything back. If you need to cut expenses to make your debt payments, then you have to do it.
- Avoid bankruptcy, foreclosure, and short sale. These derogatory items stay on your credit report for 7 to 10 years.
- Have insurances in place. Make sure you’re adequately insured for health, dental, home, and auto insurance to avoid incidents that could cause you to default on your loan payments.
- Emergency Fund. Make sure you have an emergency fund to help you through rough financial times. Experts recommend a fully-funded emergency fund that has enough money to cover 3-6 months of living expenses.
- Pay down your debt. This is by far the best way to improve your credit and overall finances. Just try to get out of debt as best as you can. The only thing that you should owe is your mortgage and nothing else.
- Do not max out any of your credit cards.
- Do not get store credit cards which often offer low credit limits — sometimes equal to your purchase amount, which automatically gives you a 100% utilization rate for that card.
- Ask your credit card issuers for a higher credit limit. This is a hack to give you a short-term boost to your credit and not a long-term solution.
Length of Credit History
- Keep your old credit cards around. Don’t close these accounts even if you don’t use them (unless you have to pay a fee).
- There’s no sense in getting into debt to improve your credit mix, but having a wider variety of different types of debts and loans do help increase your credit score.
- Avoid credit hard pulls. Understand the difference between a soft pull and hard pull. Avoid activities that create a hard pull because it impacts your score negatively.
- Rate shop within 30 days. When shopping for the best car loan rate or mortgage rate, do all your rate shopping in 30 days. Each inquiry will show on the credit report, but all the inquiries only count against you once.
You need to note that it takes time for your credit score to improve, so please be patient.
In addition to the ideas above, you can also try some of these ideas:
- Use the Bureaus’ Online Dispute Process. Some people have said that they get quicker results this way, but make sure you still get printouts of everything you are doing.
- Try to get Bureaus to add Positive Accounts – Your credit reports do not have all of your accounts. For example,
- Use Credit Builder Loans. Credit builder loans allow you to borrow a relatively small sum of money, e.g., $500 to $1,000. Unlike a typical loan, you make your “loan payments” to the lender first, the lender then gives you the money once you paid your loan in full. These payments appear on your credit report and help increase your credit score.
- Secure Credit Cards. You get a line of credit from a secured credit card, which is guaranteed by your bank account, such as certificates of deposit or savings account. The balance in your bank account is the credit limit. As you use your card, the payments become part of your payment history and can raise your scores.
Do you know another credit score improvement tip? Please share yours here.
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.