Improve Your Credit Score

It’s safe to say that most of us understand the importance of credit in today’s world. Not only does it affect your buying power, but it can also affect your ability to rent or own a home, get a job, and even what you’ll pay for insurance coverage. Trying to maintain a healthy credit score can cause some individuals stress. It’s important to gain a clear view of where we are financially so that we can set a goal and make a practical plan of where we want to be in the future.    

Fortunately, no matter where you’re starting, there are a few things you can do to increase your credit score. Below, are some basic steps that you can take to get started on a path to a healthier credit score:

1. Make All Payments in Full and On Time.

Payment history is the largest factor that determines your credit score. It accounts for 35% of the score, itself. Therefore, making payments on time is the most effective way to increase your credit score and build a good credit file.  Missing a payment or two can happen in times of financial difficulty and can add to any financial stress you may already be experiencing. However, no other strategy to improve your credit score will work if you are missing or making past due payments.  

Late and missed payments start reporting to the credit bureaus once they are over 30 days past due and can stay on your credit report for 7 years. That’s a long time for a bump in the road to follow you. To minimize the damage late and missed payments can do to your score, reach out to your lender or creditor, and make arrangements to pay as soon as possible. Some will offer payment plans that will stop late fees or higher interest rates from hitting your account. Addressing them can also give you some peace of mind, knowing that you are handling them the best you can for your current situation.   

2. Make Use of a Secured Credit Card

Payment history makes up another 15% of your score, therefore, good payment history is what builds healthy credit files. If you lack a “positive pay history” on your credit report, it’s time to start creating some by opening a credit a secured credit card.   

A secured credit card is one that requires an upfront “security deposit” or collateral. Most start with credit limits as low as $200. Once you secure the maximum credit card balance, the lender will extend a credit card account to you in the same amount, and you can begin building a payment history.  

After you’ve made consistent and on-time payments for 6 months to a year, most lenders will release the collateral and return your deposit.  

Saver Tip: It’s recommended to have two to three credit lines reporting a good payment history at a time. These should also be different types of accounts, like a credit card and an installment loan. Your credit “mix” accounts for 10% of your score.   

Although credit “mix” accounts for 10% of your credit score, and more than one tradeline reporting aids in your progress, it’s best to stick to just a couple to start. Adding too many new accounts to your report at once can lead to more debt and can result in lenders questioning your ability to repay them all. Work to build a good payment history on just a couple of accounts in the beginning, then add accounts as your credit file grows and your score increases.   

3. Maintain Low Overall Credit Utilization. 

 The balances you carry on credit lines account for 30% of your credit score and are the 2nd largest contributing factor.   A general rule of thumb is to maintain a balance below 30% of your overall available credit. Carrying any balance will affect your score, but anything over 30% is when the amount it affects begins to increase.   

Paying down balances is one of the best (and quickest) ways to increase your credit score. The key is having the lowest possible balance each month when your creditor reports to the credit bureaus. You can find this date in two places – on your credit report and your billing statement. On the credit report, the date will show as “date updated” or “last reported,” and on your billing statement it will be your statement closing date. Plan to pay down the balance as much as possible right before this date each month.   

Saver Tip: You can also request a credit limit increase to lower your overall utilization. However, be cautious – increased credit limits can lead to more spending (and more stress) so only choose this option if you can ignore the temptation.   

©America Saves Week