Banks and other lenders use credit scores to decide whether to let you borrow money and your cost of lending. A difference of even a few points may tip the scales of qualifying for a car loan, mortgage or credit cards in your favor. Not all tips to improve your scores seem evident, and some may run against the traditional personal finance advice. Depending on your financial condition, these less apparent methods can strengthen your credit score. The rationale behind these suggestions becomes clearer when you understand how they relate to the factors involved in your credit score.
1. Pay Before the Report Date
Pay off, or at least pay down significantly, charges or balances on your account by the “report date.” This represents when a credit card company reports the account activity, including the balance and payments, to the major credit bureaus. Usually, the reports to the credit bureaus precede the due date of your payment.
While the report date differs for each account, many credit card companies put that date on the end of the billing cycle. Some statements will call this the “closing date.” Contact your credit card company for the date it reports to the credit bureau.
When you pay charges in full or reduce them before the report date, your credit report will show smaller or zero balances. If you pay by the due date, but after the report date, the credit bureaus will show that you carried a balance.
If possible, you want balances as close to zero or otherwise low. This is because your outstanding balances factor into your credit utilization rate. To calculate it, divide your outstanding balances by the credit limits. If you owe $300 on a credit card that caps you at $3,000, you have a respectable rate of 10 percent. That $300 balance on a card with just a $500 credit limit ups your utilization rate to 60 percent. The Fair Isaac Corporation bases 35 percent of your credit score on the utilization rate.
2. Get Higher Limits
The same rationale of a lower utilization rate supports your asking for a credit limit spike. Here, wanting a higher limit increases the denominator. Assuming that you keep your card balance steady or declining, your credit report will show a lower utilization rate.
Credit card companies often raise credit limits even when their customers don’t ask. If you get such an automatic increase, it can raise or accompany an increase in your score. The credit card company unilaterally raises your credit limit express its confidence in how you handle debt and encourage more use. With the latter, credit card companies can earn interest.
Asking for a higher limit presents some potential traps. Such a request may generate inquiries by your company into all of your credit history. FICO deducts usually up to five points from your score for these “hard inquiries.” Using the higher limits as a license for more charges may undermine your efforts for a lower utilization rate and higher score.
3. Keep Charging
The conventional wisdom of not using credit cards applies strongly if you struggle with debt or bad spending habits. Should you possess the ability and discipline with credit, continued use actually helps your score. As you charge, you follow with an on-time payment of at least the minimum. When you do this regularly, you build a history of months and even years of handling credit responsibility. Your payment history counts for 35 percent of your credit score.
You may find benefits of continued charging that complements building the credit score. Many department stores tout sale prices and other discounts for purchases with the store-issued cards. Relatively speaking, your purchases likely do not prove very costly. With some restraint in your purchasing, you can pay off the charges before the posting date or due date and avoid interest that can offset the discounts.
4. Tout On-Time Utility Bill Payments
Traditionally, bill payments only worked against you — that is, when you were tardy or missed a payment. Even though your water, lights, cable, internet or other bills do not count as credit accounts, late or missed payments reveal potential financial problems. Utility companies report delinquent amounts to encourage you pay and, ultimately, may refer these past-due amounts to collection agencies.
Consider asking your wireless, cable or satellite, Internet, electric or other utility provider to report on-time payments to the credit bureaus. Bear in mind that no law requires utility companies to report your positive activity.
One credit reporting agency has become proactive in using utility payments to help consumers. Experian Boost, a service of Experian, retrieves payments from your bank account to utility companies. Eligible customers can get credit score increases as a result of the on-time payments. If you participate, your missed payments do not get reported and do not count against you. According to Experian, nearly three out of four people with sub-680 FICO scores experienced increases through Experian Boost’s reporting of utility bill payments.
5. Credit-Builder Loans
Consumers with very low scores likely have difficulty qualifying for any credit. If you have experienced bankruptcy, judgments, foreclosures or serious delinquencies, your opportunities for credit and building your score are limited, but not absent.
Credit-builder loans afford one path to improving scores and credit histories. You borrow a relatively small sum, such as $500 to $1,000. Unlike most loans, you don’t access the money immediately. Instead, you make periodic loan payments into a bank account established by the lender. Those payments appear on your credit report. When you pay off the balance, the money and increased credit scores belong to you.
6. Secure Credit Cards
Secured credit cards serve as a variant of credit-builder loans. You immediately get an extension of credit from a secured card. A bank account, such as certificates of deposit or savings account, backs the credit card. The balance in the bank account represents the credit limit. As you pay, the payments become part of your payment history and can raise your scores.
7. Look for Mistakes on the Credit Report
Erroneous information on your credit report steals points away from your score. To avoid these unnecessary leaks in your credit grade, examine your credit report regularly. AnnualCreditReport.com affords you one free report annually from Experian, TransUnion and Equifax. Federal law entitles you to a free report for other reasons, such as the denial of credit or employment when the lender or employer relied on information in your credit report.
A trusted credit repair service can help you with disputing mistakes on your credit report. Although you can file disputes yourself for free, a repair company offers expertise in compiling the necessary receipts, statements, texts, correspondence and other information to support your contentions as to what your credit report should say and omit.
Beyond correcting mistakes, you may find from a reputable company sound counseling and frank advice on how to avoid credit pitfalls that can damage your credit. An analysis of your credit situation by a credit repair company may show more fundamental problems in your financial life, such as lack of income or too much reliance on credit. If any of these scenarios fit you, improving your score might mean first ordering your spending priorities and your use of credit.
Patricia Russell is a Certified Financial Planner® and the founder of FinanceMarvel. She decided to start her blog as a method of sharing what she has learnt about personal finance over the last 10 years. Her mission is to spread as much wisdom about about achieving financial freedom as possible.