6 Ways to Improve Your Credit Score
Improve Your Credit Score by Following Our 6 Tips
Has your credit score “tanked” or been reducing for whatever reason? Don’t throw in the towel and just give up. There is something you can do about it if you’re willing to work hard at it. We’re not saying it’s going to be easy, but it will be worthwhile. Follow our 6 tips to improve your credit score, and it will pay off.
No question about it, improving your credit score is worth spending some time and sweat. It’s also a good investment in the long run as you’ll see later on in this article.
How many times have you applied for a car loan or a credit card and been declined? Or maybe, they let it go through, but at a high rate of interest. If you have good credit, you’ll have a much easier time when you apply for a loan, plus, you’ll get a nice break on the interest rate.
We’ll show you how credit scoring works and some very useful tips on how you can improve your credit score. You don’t need to hire someone and pay them your hard-earned money, either. What we will show you here, you can do all by yourself.
There basically are two types of credit scores used in the USA. One is FICO (one everyone knows) and the other is VantageScore. Most lenders use FICO, others use VantageScore, and some a combination of the two.
The scores are calculated using a rather complex software program. The bottom line and sole purpose of getting a credit score is to find out what their risk is when they extend credit to you. So, the higher your score, the less hassle you’ll have.
It doesn’t matter which scoring program the lender uses, both will evaluate the approximate risk to the lender, if they give you credit. It calculates the risk of you being able to pay back a loan or a credit card within 24 months without being 90 days late in your payments.
The following items, and more, are considered by the credit scoring software when determining your score:
- How many times in the past 12 months you applied for credit?
- If you paid any bills late. If you did, how late they were and how recent?
- When you opened your first loan or credit card & the average age of all accounts?
- Your handling of a mix of account types – installment, revolving, etc.
- Your credit utilization – relationship between card limits & balances
You’ll be in very good shape if your credit report reflects a number of years of payments made on time, had low credit utilization, and was able to manage a variety of types of accounts such as loans, credit cards, and also utility bills. They figure if you handled your accounts good in the past, you’re likely to continue doing so.
If you have an excellent credit score, get set to enjoy all of the perks. 300 to 850 is the range of FICO scores. If your score is between 800 and 850, it’s considered exceptionally good.
The following 6 tips can be used to improve your credit score:
1. Check all 3 credit bureau reports annually
Don’t be surprised to find out that you have more than one credit score. Actually, you have even more than three (number of credit bureaus). There are probably hundreds of credit scoring software programs that are available.
You have no control over the credit scoring program that a lender may use. Most of them use the FICO and some VantageScore. Others – who knows? You do have some control over your credit reporting bureau reports. There are only three- Experian, Equifax, and TransUnion.
Once a year you can get a free copy of your credit report from each credit bureau by going to this website: AnnualCreditReport.com. Mistakes happen once in a while, so by getting a free copy of your credit report, you should be able to spot them and improve your credit score.
If you find one, dispute it immediately, before it has any impact on a future lender. Once it is corrected, your credit score could improve.
2. Make all of your payments on time
The very best way to show any lender that you’re responsible with your credit is by paying every bill or loan payment on time. There is no grace period – if a payment is due on the 1st, pay it on or before that date.
FICO and VantageScore consider payment history the most important factor. FICO, in particular, considers payment history to be worth 35% of your total score.
According to John Ulzheimer, a former credit expert with Equifax and FICO, “Above all else, you need to avoid defaults, late payments, foreclosures, and third-party collection efforts.” “Anything that shows you to be a bad risk with any type of credit, especially filing bankruptcy, is going to hurt your credit score in a big way.”
Making payments late, even if it’s occasionally, can have a negative effect on your credit score. One way to improve your credit score is to have automatic payments set up with your checking account or even a credit card. An emergency fund can help too as a source of money if you run short.
3. Keep your credit utilization rate as low as possible
This factor is number two in importance for FICO. They calculate this by looking at the amount you have borrowed to how much credit you have available. Again, FICO allocates 30% of your total credit score to this ratio.
As you pay down the amount borrowed, the amount being used is less, and as a result the credit utilization rate is lower. Your overall credit score could improve by doing this.
So, what is the ideal credit utilization rate? Frankly, it varies because of the different credit scoring programs the lender uses. Ideally, paying your credit card balances in full each month is what you should strive for.
Some feel that if you ask your credit card issuer for an increase in the limit, it will help. Maybe, if you didn’t use it! However, if your credit score is not very high, it’s doubtful if a credit card issuer would increase the limit.
As far as FICO is concerned, a utilization rate of under 10% should be your target. Ulzheimer says that “people with high FICO scores average a utilization rate of 7%.” To show how these things differ, consider VantageScore who looks for under 30%. Go figure!
Ulzheimer says that “try to keep yours at 10% and in that way, you satisfy both programs.” There are many other factors that influence your credit score. The date your lender reports your information to any credit bureau also has an effect.
Instead of being reported in real time as your balance decreases or increases. They report at the end of the month only. They report your balance as of the date they report, which could be much different than what it actually is. Paying your bills before the end of the month could also help to improve your credit score.
Another way to help might be to consolidate your debt into a personal loan or maybe with a zero percent introductory interest rate balance transfer credit card. Again, every situation is different, so you will need to weigh all factors.
4. Maybe a relative or a friend can help
As we mentioned before, the length of your credit history is a factor for your credit score. In most cases, the best option is just to wait it out for this factor. However, there are some individuals that ask a relative or a close friend to add you as an authorized user on their credit card as a way to improve your credit score.
By doing this, it could help your score as far as credit history is concerned, as long as the account you’re being added to is in excellent shape – no late payments – low utilization rate, etc.
There are companies on the internet that will “rent” authorized user permission on a stranger’s credit card, for a fee. I personally am against any of these practices, and believe you could be charged with fraud. Don’t do this – period!
If you want help from a friend or relative, a debt consolidation loan is okay. But good luck getting this.
5. Try self-reporting services
Most lenders use the average age and number of various accounts listed on your credit report to see how you have been handling your debt. If you have a relatively new account, or maybe just a small number of accounts reporting, you may find yourself at a disadvantage.
In cases such as this, there is another way of “boosting” your credit report. What this means is that the credit bureaus will allow you to self-report other credit information. Many of them charge a fee for doing this, but there are two free ones that you can take a look at. They could help to improve your credit score.
The first one is Experian Boost. They allow you to connect your online banking data where you give permission to Experian to add utility and telecommunications payments to your credit history. If you have those payments set up as an automatic debit to your checking account, they will always show up as paid on time. (as long as you keep money in the account to pay them)
The second free one is UltraFICO. They too, allow connecting your deposit accounts, that are used along with your credit report when calculating your UltraFICO score.
In addition to the two free programs, there are several that charge a fee for these services. They are eCredable Lift, PayYourRent, and RentTrack. You need to be careful using these services so that only accounts with a positive payment history are reported.
Experian Boost will only report accounts that have a good payment history, but many others will report positive and negative accounts.
6. Never apply for new credit too often
Most people don’t know this, but every time you apply for new credit, a “hard” inquiry is shown on your credit report. This type of inquiry will be considered with other factors, and could lower your credit score for a short period of time.
Plus, the inquiry will stay on your credit report for 24 months and could impact your credit score for the first 12 months. Also, before you make a formal request for new credit, do some research and see if you have a good chance of being approved.
There’s no point in taking a chance of your credit score being lowered for a declined application. Plus, never apply for several credit cards within a short period of time just before applying for a home mortgage.
Several credit scoring models will allow you to “rate shop” without assigning you a penalty on your score. At FICO, if you’re shopping for a home mortgage, an auto loan, and even a student loan, they will count the multiple applications as one hard inquiry if they are from 14 to 45 days.
At VantageScore, they will count the inquiries as one hard inquiry if they are within a 14-day time frame. Be advised that when you check your own credit report, it’s counted as a “soft inquiry.” Normally, this type of inquiry has no effect on your credit score.
The time frames mentioned above can change as determined by the credit bureaus, so they are not cut in stone. If you want to improve your credit score, keep a sharp eye on this issue.
There is no way that you can achieve a perfect credit score overnight, so don’t be discouraged. You need to take one step at a time and begin with making every payment on time. As your credit score moves up, you can begin to save some money and maybe take advantage of new opportunities.
Some important rules of thumb to remember are:
- Pay all of your bills on time
- Develop good habits in handling long-term debt
- Keep your utilization rate low
- Apply for new credit only when you must have it
If you really want to improve your credit score, do your best to follow these rules, and over time, you’ll see an improvement.
An accountant and tax preparer by profession, Gust’s true passion lies in his company blog titled “HBS Financial Group, Ltd.”. Through this venue, he not only tries to teach individuals about budgeting, money management, and taxation but he writes the majority of the articles as well.