These 4 Simple Tips Could Increase Your Credit Score
If you've ever applied for a credit card and been denied, you know it can be demoralizing.
Being told "no" is never fun. For many of us, that "no" is the first time we realize just how big an impact our credit score has on our daily lives.
Like it or not, your credit score is a big deal if you ever want to qualify for a mortgage, get a great interest rate on an auto loan, or even find a new apartment or job.
Understanding its importance is why so many of us have high credit score aspirations.
In fact, according to the Capital One Credit Confidence Study,
of people said they want to increase their credit score in the next year.
Like most financial goals, you'll need a plan if you want to succeed. We can't just wish for a higher score, hoping it will magically get better -especially, if we're not addressing the poor credit management behavior that got us here in the first place - like not paying bills on time or having too high of a balance on our cards.
So if you're really committed to increasing your credit score, it's time to get schooled on which behaviors send it soaring or plummeting.
The good news is you have the power to increase your credit score if you understand the basic formula of what goes into it. Even better, there are a few simple steps you can take to improve it. Take a look at how your score is created and these credit-building solutions below.
Behold: How your credit score is calculated
A credit score is made up of several different factors from your credit report, both positive and negative.
The most commonly used one is the FICO score, which ranges from 300 – 850.
Scores above 800 are considered "exceptional"; from 740-799 are "very good"; 670 – 739 puts you in the "good" range; 580 – 669 is the "fair" category; and below 579 is "poor."
Card issuers and bank loan officers look at things like:
- How much debt do you have now, like money owed on other credit cards
- Length of your credit history
- How well you've made bill/ debt payments in the past (don't "forget" payments!)
- Your "credit mix," which means what type of debt or loans you have. A mix could include a mortgage, student loans, & credit card balances, for example.
If you perform well on all the factors listed above, then congrats because that three-digit number, which determines a large part of your financial fate, should be relatively high. You should be looking at credit cards that offer you juicy rewards and other financial programs designed for successful credit managers like yourself.
If not, don't worry or agonize too much. Just by wanting to have a higher credit score, you've taken the first step to getting one. You now know what a credit score is and how it's basically created. Together with your determination to revitalize your credit credentials in 2017, you can start taking advantage of these four simple score-boosting strategies. Depending on your financial situation, you could begin seeing significant progress within a few months.
Before you can increase your score, you need to know where you stand.
You're entitled to a free credit report each year via AnnualCreditReport from each of the three major credit bureaus, Experian, Equifax, and Transunion. Don't feel apprehensive about requesting a credit report. It does not affect your score.
These reports compile your credit and loan activity and payment history, among other things. Ultimately, the information in these reports is what's used by the credit scoring algorithms to come up with your score. Looking over your report will give you access to the vital information needed to plot your next move.
A Federal Trade Commission (FTC) study found that nearly 1 out every 5 consumers had at least one error on one of their credit reports from the three big reporting agencies.
That is, if you request a credit report from all three agencies, there's a 20 percent chance that one of those reports will contain an error. A mistake on yours could be hurting your score without you even knowing it.
Don't think these are harmless clerical errors. Mistakes by these agencies have more serious consequences for consumers than simply reporting a lower credit score.
Nearly two million Americans could be paying higher interest rates for things like car loans and insurance than they deserve, according to the FTC study.
- If there are mistakes in your credit file that go unnoticed, such as a delinquent payment that you actually resolved, it could result in a score drop that moves you into a lower tier (so, you might go from a "good" score to "fair") when seeking a home loan.
As Interest reports, that drop can easily create a scenario where you suddenly don't qualify for the best interest rate offers from mortgage lenders—a scenario that can equate to costing you thousands of dollars over the life of your loan.
So, first things first— follow these steps as recommended by financial writer Clark Howard:
Request your credit reports for free via AnnualCreditReport and examine them carefully. You're looking for things like a late payment ding you know you made on time. To help you check, know that a credit report has three main sections. We've outlined them below and given some advice on how to look them over. Basically, you need to check each section for inaccurate information. Be sure to check the report for information related to your previous and current spouse, if you're married. Generally speaking, your credit score is based on your financial history, not your spouse's. As a result, when you look over each section in your credit report, keep in mind your previous and current spouse. You don't want to be penalized because a spouse filed for bankruptcy, for example. Margaret Reiter, an attorney put together a great list of what you should check over for each section in the credit report on the the legal reference site, NOLO. Fixing any errors you see on that list will help drive your credit score upwards. Main sections in your credit report to check:
- Personal Information - Is your name, address, contact info., etc. all correct? Little things matter.
- Public Records - Are any lawsuits, bankruptcies, etc. reported accurately? Make sure you're connected to any that belong to your spouse, if married.
- Credit Accounts - See any late fees or outstanding balances that look fishy?
- Inquires - Did you test drive a car and the dealer pulled your credit report without your permission? Inquires that you didn't authorize can be fixed helping drive that score up.
- Call your credit issuer to report any mistakes, such as if you were reported as making a late payment, but you have documentation that proves otherwise. At the same time, you'll want to get the ball rolling to correct your credit report by notifying one of the three credit bureaus; whichever one you choose to contact will notify the other two on your behalf. The simplest way to report an error is on any of the bureau's websites: Experian, Equifax, and TransUnion.
- You may also choose to report the error via certified mail with return receipt requested so that you have a paper trail for follow up if necessary, suggests Howard. No matter which way you choose to submit your dispute, the bureaus have up to 30 days to investigate your claim, and then if warranted, remove the item from your report.
- Call your credit card issuer and speak to a customer service agent like a friend. By approaching the call in a conversational way - explaining that you're interested to improve your credit score - you'll often kickstart a discussion that yields unexpected benefits. As Oprah Winfrey said, "you only get what you have the courage to ask for."
Try these questions and approach:
- "Are you seeing anything that could help me?" By being less specific and asking for your help, you empower the customer service representative to be their best.
- "I know I was late for one payment. Is there a way to waive that late fee, so it doesn't stay with me for a long time on my report" (it helps if you're all paid up when asking for this assistance)?
- If you don't get anywhere, call back and speak with a different representative. You'd be surprised at the different results you'll get.
If it turns out that you are able to successfully correct a negative item, your credit score could see a boost within a few weeks. The difference between a credit score that reflects no late payments versus one that has an outstanding payment (more than 90 days) can be significant. And you wouldn't want a discrepancy like that to stand between you and a fantastic interest rate, which could mean paying hundreds of dollars less on a loan.
The most heavily weighted factor affecting your credit score is your payment history. When you pay a bill 30 or more days late, the credit bureaus are notified, and it will drop your score. A pattern of late payments is a red flag to potential lenders that you're not responsibly managing your debt.
You may have thought, "I'm only late paying off a bill worth a few dollars." Or, "I'm only a 'little' late," but now you know that a credit score drop can have more serious implications. Besides the damage missing a payment does to your credit score, even very small fees can rapidly grow into very large amounts because of interest charges.
What's great today is that many creditors offer the option for you to set up automated payments each time a bill arrives.
Log onto your credit card app or website, and opt to automate just the minimum payment. It will ensure you'll never miss the due date. If you do carry a balance higher than the minimum, you can log on at your leisure to make an additional payment.
Having an automatic payment system in place today will help you avoid late charges and credit score dings tomorrow.
The second biggest factor affecting credit score is debt utilization, or how much of your available credit you're using. So, if you have a $10,000 credit limit, carrying a $7,500 balance (or 75 percent utilization rate) doesn't reflect well on you.
Experts recommend staying as close to zero as possible and no higher than
As peers over NerdWallet explain, "Consumers with good credit have a 30 percent credit utilization ratio on average. This seems to support the idea that maintaining a ratio of 30 percent isn't a bad thing, and it could even be regarded as an upper limit to maintain good credit. Experian data also shows that consumers with the best credit scores utilize only 8 percent of their available credit, proving that the lower your ratio, the better."
Bonus tip: If you're in good standing and know you can responsibly manage your finances, it may be worth raising your credit limit to get your debt utilization to a healthy ratio. Call your credit card company to request a credit limit increase. If the creditor moves you from a $10,000 limit to a $15,000 one, for instance, that $7,500 balance is now a 50 percent utilization instead of 75 percent.
What this all boils down to is that paying off a sizable chunk of debt can help improve your debt utilization rate, and in turn, your credit score. Take a look at how your account balances are in relation to your available credit limits, and if you have the means, consider making a lump sum payment toward the account with the highest utilization. As long as you keep an emergency fund in place, taking some money out of savings for this purpose is a smart move.
Besides the obvious benefit of having a lower balance, working your debt utilization down to the 30 percent or less will do wonders for your credit score.
As they say, "you have to be in it to win in." In other words, your FICO score is based on whether you use credit responsibly over time.
Experian notes that avoiding credit, closing out old accounts, or living a cash-only lifestyle will not necessarily help your credit score.
That's because without a positive, consistent history of responsibly managing a mix of credit products, a potential auto lender, mortgage company, or other entity may not be convinced you're trustworthy enough to do business with. Or, they may take a chance on you, but tack on some extra interest since you pose a higher risk.
Instead of cutting up your cards out of frustration (only once they're paid off!), keep one or two accounts active by charging small amounts each month, recommends U.S. News and World Report. But pay them off on time and in full! Then you'll have access to credit—in case you need it—and the credit score you'll want later.