Improving your credit score may seem daunting, but there are numerous ways you can begin improving your score today. Rather than feeling overwhelmed, taking a look at what you can do day by day to improve your score will help you in the long run.
Before developing a plan to improve your credit score, it is helpful to understand what factors contribute to the calculation. According to myFICO.com, a FICO® score considers both positive and negative information and factors in payment history, amounts owed, length of credit history, new credit and types of credit used.
Once you understand how the FICO risk score is calculated, you can begin improving your credit. Before implementing measures to improve your score, obtaining your credit report from any of the three national credit reporting bureaus can help you understand where you are and how to better set goals of where you would like your score to be. Remember, each consumer is entitled to a free credit report once a year from Experian, Equifax and TransUnion.
Here are 10 helpful ways to improve your credit score:
- Review your credit report for any errors
According to a study conducted by the Federal Trade Commission (FTC), one in four consumers found errors on their credit reports that might affect their scores. Should you find an error on your credit report, under Fair Credit Reporting Act (FCRA) regulations, the information must be corrected by the agency and company that furnished the report.
- Establish a budget
Remember, amounts owed contribute 30 percent to determining your credit score. Restricting the use of your cards, making payments in cash and allocating your monthly expenses to include paying down your debt can help improve your credit score. Write down a manageable monthly budget that allows you to focus on improving the debt-to-income ratio. Keeping an expense log or using a mobile app that tracks your expenses can help keep you disciplined. Additionally, making an effort to save money each month will help you save up to afford expenses you might otherwise have needed to charge. This can help you eliminate running up extensive credit card bills.
- Pay your bills on time
Thirty-five percent of your credit score is determined by your payment history. If you aren’t making payments on time, this is sure to impact your credit score substantially. According to myFICO.com, your score considers the following: How late the payments were, how much was owed, how recently they occurred and how many there are. Enrolling in auto-payments each month or setting calendar reminders can help you stay on track. If you’re having difficulty making the payments, re-evaluate your budget and expenses.
- Pay off small balances
As you continue making progress on reducing existing debt, take the opportunity to pay off small balances to give your credit a more immediate boost. Once you pay the remaining balance, do not close the account. Keep the accounts open to continue receiving the benefit of your responsible payment and credit histories, while selecting one or two cards that you use on a regular basis to make purchases with.
- Pay credit card bills each month, in full
Paying off your credit cards in full each month can help your budget by avoiding interest. This is particularly true if you are working to establish or recover from prior poor credit history, as consumers in those situations typically face higher interest rates than individuals with good or excellent credit. Paying your bill in full each month also helps minimize your credit utilization and your debt-to-income ratio to under 43 percent, while charging more and paying less can be an indication of increased risk. This can potentially have negative consequences for your credit score.
- Request a credit limit increase
Once you evaluate your debt-to-income ratio, asking to increase your credit limits could also help improve your credit score by reducing your utilization ratio. If the credit limits are increased, don’t go out and spend it but continue paying down any remaining balances to improve this ratio. This should be included in your monthly budget. If you are denied the credit limit increase, wait a few months and make the request again or shift your focus to reducing existing debt.
- Do not close old accounts
Length of credit history accounts for 15 percent of your credit score. According to myFICO.com, a longer credit history typically improves your score. The age of your oldest and newest accounts, as well as the average age of all accounts is considered. Additionally, your credit algorithm considers how long it has been since you last used the account. Once an account is closed, the seven year countdown begins to when it will no longer be listed on your credit report. Keep the account open and continue to use old cards to benefit from length of credit history, rather than opening numerous new accounts.
- Be responsible with student loans
Making on-time monthly payments on student loans can help you establish credit history and increase your score. If you are struggling to make payments and become delinquent, resolving the situation can result in an increase in your credit score. Depending on your circumstances, a deferment could also help and it will not negatively impact your credit score. Once your loans are paid off, you can expect an increase to your credit score. A history of on-time payments also demonstrates the responsibility of the borrower, which can help in obtaining lines of credit in the future.
- Evaluate your debt-to-income ratio
To establish your debt-to-income ratio, add up monthly debt payments and divide the total by your gross monthly income. According to the Consumer Financial Protection Bureau (CFPB), typically the highest debt-to-income ratio a consumer can have and still get approved for a mortgage is 43 percent.
- Monitor your credit activity and score
According to a report released in early 2014 by the FTC, identity theft continues to be their top complaint received. In addition to monitoring your credit activity to track how your habits affect your risk score, it is important to remain vigilant in regards to identity theft. If you’re not closely monitoring credit activity, you might overlook the fraudulent behavior negatively impacting your score. Take a proactive approach to guard against identity theft. Remember that it is never too late to begin monitoring your activity or to begin the process of returning to your pre theft status and credit score.
By identifying your current risk score, setting realistic goals and sticking to a plan, you can easily improve your credit score one step at a time. Additionally, understanding the factors that contribute to determining your score can help you better plan to meet your goals. These simple ways to improve your credit score can benefit you whether you’re applying for a rental property, buying a car, or opening an account with a utility company. By improving your credit, you’re more likely to get approved for your dream home and less likely to be required to put a deposit down for utility services.
By: Laura Mowry