Ways to Increase Your Credit Score
Start With a Current, Accurate Credit ReportYou’re entitled to one free credit report every year from the three major credit bureaus: Experian, Equifax, and TransUnion. If you’re worried about pulling your credit and lowering your score even further, remember that these three reports are entirely free and won’t impact your rating. Don’t assume that you have the right score, either. Even if you checked last year, it’s possible that your score wasn’t entirely accurate. In 2012, the Federal Trade Commission conducted a study and found that one in five consumers had errors on their credit reports. A follow-up in 2015 revealed that nearly 70 percent of people who disputed at least one unresolved error still believed that their report held at least one inaccuracy. It’s important to get the most current version of your report when you’re trying to get better credit. Comb through each listing carefully and make sure that there isn’t anything unfamiliar or inaccurate. Report any error to the appropriate credit reporting agency as soon as possible. The safest and most secure way to get your free credit reports from all three bureaus at once is through annualcreditreport.com, which is overseen by the government.
What Does Your Credit Score Really Mean?Credit scores range from poor to excellent, but you may not know where your actual number places you on the spectrum. Often, you’ll hear lenders and companies mention your FICO score, which is used to assess a person’s credit risk. A FICO score ranges between 300 and 850, and anything below 620 will often result in a denial from lenders. Your FICO score is calculated using a formula that incorporates your payment history, length of credit history, unpaid debt and old and new credit. Your credit mix counts for approximately 10 percent of your FICO score. A credit mix is a combination of all the different types of credits on a person’s report, ranging from loans and bills to credit cards and mortgages. An accurate credit report will give you the best idea of your current standing as you devise an action plan.
Identify Where You Need to ImproveThe same areas that your credit score reflects are where you can begin to make improvements. Once you’ve identified, reported and corrected any errors, it’s time to start taking action that will raise credit. If you’ve defaulted on a loan in the past, take a look at new charges. As defaults are passed on to new collectors, the same loan could cause multiple hits against your credit score. If this has happened for multiple loans and you’re still struggling with repayments, you may want to consider debt consolidation. Consolidating your outstanding loans can help you prevent defaults in the future, sparing your credit score. It’s not a decision to take lightly, but it’s worth considering if your student loans, medical bills, and credit card payments are mounting higher and higher each month, trapping you in an endless cycle of interest and repayments.
Use Resources to Track Your ProgressSign up for a free account on credit.com to track your progress and develop a strategy. Credit.com also provides insight into weak areas that can help you improve and develop a stronger score that lasts. In addition, The Balance published this list of seven mobile apps for credit management that will allow you to stay up to date on all your payments anytime, anywhere. Working with a credit recovery agency can also help; trained credit counselors will help you gain a better handle on all of your outstanding payments. Collaborating with your bank, lenders or a credit agency will make it easier to understand the most effective strategies for paying off debt, increasing your credit score and living debt-free in the future. The National Foundation for Credit Counseling offers credit and debt counseling that covers many different topics ranging from credit card debt management to bankruptcy. Their site also features a vast array of tools and information to help you learn the ins and outs of debt relief and credit score building.
Steer Clear of Quick Fixes for Better CreditIt might go without saying, but avoid taking out any loans or applying for new cards as you try to rebuild your score. You want to keep your debt-to-credit ratio low, and it won’t be easy to stay ahead if you take out more money that offsets your balance. Some people think that it’s a good idea to take out a loan or use a card to pay off debt, but this can do more harm than good, especially with all the interest and hidden fees that accompany larger balances. Although it’s tempting to just pay off as much as you can with a big loan or charge, this method only creates another problem. Your goal should not be to have more payments but instead to find ways to tackle your smallest bills first, make deadlines and avoid any late fees, additional interest or defaults. If you want to raise credit, you need to develop the financial skills necessary to maintain it as well.
Start Repaying Loans on TimeLate payments on outstanding debt are one of the greatest contributors to a low credit score. Your payment history reflects in your FICO score, and if you consistently fail to pay your student loans, credit card bill, and other expenses on time, it will cost you more in the long run. If you have a lot of unnecessary credit cards with outstanding balances, you can close them without having to pay off what you owe. However, the issuer may charge you a hefty cancellation fee, and closing credit cards to get rid of debt can lower your credit score even more. Your best bet is to contact every lender and credit card company to discuss repayment plans and find a schedule that works for you. This might take some finesse, which is why budget management tools are good ways to stay on top of any payments. If you have late payments and a viable reason, contact each lender or issuer and explain the situation. Maybe you lost your job and couldn’t make ends meet, or perhaps you didn’t even know the bill existed until recently. If you have a good history with payments, most credit card companies will waive late fees and allow you to start paying back your present balance as is. Aside from decreasing stress and getting you out of debt as fast as possible, repaying loans on time will spare your credit score from negative delinquency scores. Late payments can show up on your credit report for as long as seven years after the original delinquency date. It will take 30 days after a payment deadline for it to show up on your credit report, but even one day past due can result in penalty fees from your lender.
Start Small With a Secured CardA good credit history is roughly five years, and if you haven’t had a card that long, there’s nothing you can do but wait. In order to prevent overspending and unnecessary overages, use a secured card that will help you steadily build your credit history over time. You can use your card for everyday spending and pay it off with your debit card, so you really never spend more than you already would. Many people often think credit cards are just for emergencies or big purchases, but you can charge your groceries and pay your routine bills with them, too. This is a simple and effective way to increase your credit score by demonstrating good payment history. Smaller purchases are always easier to pay off, so you shouldn’t use your card for anything you won’t be able to cover within the next 30 days. Raising your credit score requires diligence and self-discipline, which aren’t always easy to practice. It will take work and patience, but you’ll find that being strict with yourself and budgeting can cut back on impulse buys and save you a lot of money in the process.
Avoid Applying for Unnecessary CardsThe next time you go shopping and get asked if you’d like to apply for a store card, reconsider. Although the 5 percent discount off your purchase may be tempting, the application could harm your credit score even if you’re approved. Every time you apply for a card, your credit report is affected, and points are reduced. A hard inquiry can stay on your report for two years and deduct up to five points from your credit score. That might not seem like much, but if four or five hard inquiries show up on your report in a period of two months, that’s up to 25 points you could be losing. Credit Karma recommends that you shop for things like student loans and mortgages in a short period of time, ranging between 14 to 45 days, as several hard pulls are likely to only show up as one on your credit report.
Don’t Let Yourself Get DiscouragedBy now, you know that timing is everything. A single year of loans, overspending and late fees can damage your score significantly, and it will take more than a year to recover. Although it can feel hopeless at times, you aren’t destined to live in debt forever. Even major hits to your credit score like bankruptcy disappear with time. The most important thing to do is develop a strategy, stay consistent and remind yourself what you’re striving toward. Avoiding unnecessary spending may be hard at first, but you’ll find that your credit-building habit actually carries over to other areas of your life. You can increase your credit score with consistency and commitment. Raising your credit score can make you more disciplined, accountable and proactive. Use your low credit score as an opportunity to learn more about how credit works, save money and manage your debt responsibility.
Chris Fuller went to the University of South Florida and has worked in the financial sector for over 20 years. He has extensive experience in all aspects of personal and small business lending, from personal loans, equipment finance to cash flow based solutions for small mom and pop businesses, and large corporations.