Your credit score is one of the most important measures of your financial health. It tells lenders at a glance how responsibly you use credit.
The better your score, the easier you will find it to be approved for new loans or lines of credit. A higher credit score can also open the door to the lowest available interest rates when you borrow.
If you’d like to improve your credit score, there are a number of simple things you can do.
1. Review Your Credit Reports
To improve your credit, it helps to know what might be working in your favor (or against you).
Factors that contribute to a higher credit score include a history of on-time payments, low balances on your credit cards, a mix of different credit card and loan accounts, older credit accounts, late or missed payments, and high credit card balances amongst others.
2. Get a Handle on Bill Payments
More than 90% of top lenders’s credit scores, are determined by five distinct factors:
Payment history (35%)
Credit usage (30%)
Age of credit accounts (15%)
Credit mix (10%)
New credit inquiries (10%)
As shown, payment history has the biggest impact on your credit score. Therefore, it’s better to have paid-off debts in your record.
So a simple way to improve your credit score is to avoid late payments at all costs.
If you paid your debts responsibly and on time, it’ll work in your favor.
3. Aim for 30% Credit Utilization or Less
Credit utilization refers to the portion of your credit limit that you’re using at any given time, which is the second most important factor in credit score calculations.
The simplest way to keep your credit utilization in check is to pay your credit card balances in full each month. If you can’t always do that, a good rule of thumb is to keep your total outstanding balance at 30% or less of your total credit limit.
From there you can work on whittling that down to 10% or less, which is considered ideal for improving your credit score.
4. Limit Your Requests for New Credit—and ‘Hard’ Inquiries
There are two types of inquiries into your credit history, often referred to as “hard” and “soft” inquiries.
Soft inquiries will not affect your credit score. A typical soft inquiry might include you checking your own credit, giving a potential employer permission to check your credit to determine if they want to send you preapproved credit offers.
Hard inquiries, include applications for a new credit card, a mortgage, an auto loan, or some other form of new credit.however, can affect your credit score—adversely—for anywhere from a few months to two years. Hard inquiries can
Banks could take it to mean that you need money because you’re facing financial difficulties and are therefore a bigger risk.
If you are trying to improve your credit score, avoid applying for new credit for a while.
5. Keep Old Accounts Open and Deal With Delinquencies
If you have old credit accounts you’re not using, don’t close them down. The older your average credit age, the more favorably you appear to lenders. Closing credit cards while you have a balance on other cards would lower your available credit and increase your credit utilization ratio. That could knock a few points off your score.
If you have an account with multiple late or missed payments, for instance, get caught up on the past due amount, then work out a plan for making future payments on time. That won’t erase the late payments, but it can improve your payment history going forward.
6. Consolidate Your Debts
If you have a number of outstanding debts, it could be to your advantage to take out a debt consolidation loan from a bank or credit union and pay them all off. Then you’ll just have one payment to deal with and, if you’re able to get a lower interest rate on the loan, you’ll be in a position to pay down your debt faster. That can improve your credit utilization ratio and, in turn, your credit score.
Make sure you pay at least the minimum balance due on time.
Pay down your credit card balances to keep your overall credit use low.
Don’t close old credit card accounts or apply for too many new ones.
Improving your credit score is a good goal to have, especially if you’re planning to apply for a loan to make a major purchase, or try to qualify for one of the best rewards cards available. The sooner you begin working to improve your credit, the sooner you will see results.