5 ways to improve your credit score
A credit score is a grade like those you used to get in school. But instead of assessing your academic performance, this grade is awarded on how well you manage your finances.
A score of 700 and above will get your loan applications accepted easily and with lower interest rates. However, a credit score below 600 can get you in a tough spot. You’ll find it harder to get loans and even if you’re approved for one, you’ll be charged interest rates that are higher than normal.
If you have a low credit score, don’t worry. Because just like all other grades, this one can also be improved with a little planning, effort, and time.
You can check your credit score here and then read our 5 ideas that will help you improve it.
Always pay your bills on time
Out of all the factors that make up your credit score, the most important is your payment history. Almost 35% of your credit score is a direct result of your ability to pay bills on time. This is because lenders want to make sure that they’re lending to someone who is going to pay back on time.
If you’ve been missing your payment deadlines, consider setting up an auto-payment system. This way you will not have to keep track of all the upcoming deadlines and your bills would be paid automatically.
Lower your credit utilization ratio (CUR)
In simple terms, the credit utilization ratio is the amount you currently owe divided by your total credit card limit. If you want a decent credit score, limit your CUR to under 30%. This is because you don’t want your lenders to think that you owe more than what you can pay.
A simple way to keep your CUR low is to pay your credit card balances in full each month. If you can’t do that, make sure you don’t exceed your total outstanding balance by more than 30%. This means that if you have a limit of $4000, don’t spend more than $1200.
You can do this by either charging only essential purchases — like phone and grocery bills — or by splitting your purchases between multiple cards.
In case you plan on spending more than $1200, ask your bank for a small limit increase. This way you could spend more without increasing your credit utilization ratio.
Don’t close your old accounts
As long as you are not paying annual fees on an open credit account, closing it down can harm your credit score in two ways.
First, closing it would mean giving up your credit for that specific card. This will adversely affect your credit utilization ratio by decreasing the total allowed credit.
Second, having an old account helps you build and show credit history. 15% of your credit score depends on the average age of all the accounts you have.
But keep in mind that having unpaid dues on your old accounts could knock some points off your credit score.
To avoid this, make sure you work out a plan for making future payments for them. Although this will not remove late payments from your credit history, it will definitely improve your payment history in the near future.
Don’t ask for credit very often
Applying for a loan (or a new card) will often lead to hard inquiries, which can hurt your credit score.
These inquiries are basically a credit check that lenders do on you. When you apply for a loan too often, these hard inquiries pile up. This gives future lenders an impression that you are having trouble managing your finances and therefore are a bigger risk.
Unlike hard inquiries, soft inquiries don’t affect your credit score. An example of a soft inquiry is you checking your own credit or you giving your potential employer permission to check your credit.
Remember, you don’t have to accept every credit card offer that comes to you. Don’t be a serial account opener and open an account only when you genuinely need one.
Fatten up your credit file
Thin credit file translates to ‘not enough credit history’. And how can one have a good credit score without having something to get evaluated on? This is why a thick credit file with positive credit history is essential for a good credit score.
There are several options that can help you fatten your credit file and you may want to look them up online.
Experian boost is one good example. This program collects financial data that otherwise doesn’t get recorded in your credit file and uses it to calculate your FICO score (credit score). This data usually includes banking history and utility payments.
Also, make sure your credit file doesn’t have any inaccuracies because banks can sometimes make reporting errors that can hurt your credit score. If you spot an error, file a dispute with the credit bureau and get it rectified.
These are only a few ways that can help you improve your credit score. Try these and you’ll be happy when you check your credit score the next time!