Practical Ways to Improve Your Credit Score
A good credit score is important to your financial life. But regrettably, many people don’t understand the factors that make up their score. Credit scores range from 300 to 850, and credit health determines eligibility for many loans and credit cards. Additionally, a high credit score can help you get the best interest rates on loans and credit cards. But there’s good news for people with a low credit score. Your credit habits directly affect your score, and if you’re not happy with your present score, several strategies can give your rating a boost.
Here are eight practical ways to improve your credit score.
1. Pay your bills on time
Late payments have the biggest impact on your credit score. Timeliness makes up 35% of your credit score, and with regards to loans and credit card payments, it’s important that you always pay your creditors by the due date. Creditors report delinquencies to the credit bureaus after a payment is 30 days past due. This negative remark stays on your credit report for up to seven years and lowers your credit score. And if you completely default, the creditor may give your account to a collection agency. Pay at least your minimum, and if you experience payment problems, contact your creditor and set up an alternative payment schedule.
2. Keep low credit card balances
Maxing out your credit cards or keeping balances near your credit limit can potentially lower your credit score. Like timeliness, account balances make up a big percentage of your credit score – approximately 30%. With this said, the more debt you have, the lower your score. Learn how to control your spending and only charge what you can pay off each month. If you carry a balance from month-to-month, your balance should not exceed 30% of your credit limit.
3. Do not close unused accounts
Closing a few of your credit card accounts is one way to take control of your spending. But this decision can do more harm than good. As a credit card user, you’re rewarded for a long, positive credit history. In fact, the length of your credit history makes up 15% of your credit score – the longer your credit history, the higher your credit score.
Maybe you have a few unused credit cards collecting dust and you’re thinking about closing these accounts. Understand that closing accounts can decrease the length of your credit history, thus lowering your credit score. Rather than close these accounts, place these credit cards in a safe place and forget about them. If you decide to close a few credit cards, start with your newest cards.
4. Limit credit inquiries
How many times have you been invited to apply for a retail credit card? These requests are commonplace in malls and department stores, and if you apply, you can often take 10% off your purchase. This is a tempting offer. But before you divulge your personal information and apply for a new credit card, consider the possible damage to your credit score. Credit inquiries are not harmless, and every inquiry or credit application can knock as much as 5 to 10 points off your credit score. This may not seem like a big deal, but if you apply for five credit cards, you can reduce your credit score by up to 50 points.
5. Diversify your credit
Having one or two credit accounts in your name isn’t always enough to build a firm credit score. Types of credit make up 10% of your score, and if you don’t diversify, your credit score might suffer. If you’re looking to improve your credit score, have a mixture of different types of credit in your name. For example, you might have a credit card, an auto loan, a mortgage loan and a student loan. Remember, inquiries can have a negative impact on your credit score. Therefore, you shouldn’t apply for new credit often or all at once. Be selective and space out your applications.
6. Correct your credit report
Misinformation on your credit report can also damage your credit score. Check your credit report at least once a year and report any inaccuracies to the credit bureaus. Regularly monitoring your credit report also helps you detect identity theft in its early stages. The removal of erroneous information from your credit report can give your score an immediate boost.
7. Get judgment and collection accounts off your credit report
Defaulting on a loan or credit card can result in a collection account, and if the creditor sues, a judgment may appear on your credit report. Collection accounts and judgments remain on your credit report for seven years, and both lower your credit score. However, removing this information can improve your rating.
Contact your old creditors and negotiate a truce. Offer to pay off your old debt, and in exchange, ask the creditor to remove negative items from your credit report. The creditor doesn’t have to oblige your request, but there’s no harm in asking. If the creditor agrees to your terms, get this agreement in writing before sending your payment.
8. Avoid a bankruptcy
If you can’t keep up with your bills, a bankruptcy may seem like the only alternative. But before contacting a lawyer and filing a petition, make sure you fully understand the consequences of a bankruptcy. A bankruptcy can dissolve or reorganize your debt. But unfortunately, this process is a credit score killer. In fact, credit scores can drop between 200 and 250 points after a bankruptcy. If you’re looking for a way to improve your credit score, bankruptcy is not the answer. Sure, a bankruptcy lets you start over and rebuild your credit. But it can take years to recover. Consider other alternatives.
Contact your creditors and ask them to renegotiate your terms. If you’re experiencing economic hardship, the creditor may lower your interest rate and monthly payment. This creates an affordable payment and reduces the risk of default. Another option: negotiate a debt settlement. A settlement lets you satisfy your balance for less than you owe. A debt settlement may temporarily lower your credit score, but it’s less damaging than a bankruptcy.