Improve Your Credit Score With These 4 Simple Steps
Has the recession left you with a bad credit rating? Are you having trouble getting a loan? With a little diligence and patience, you can improve your credit score. Start by following these four simple, but essential, steps that can put you back on the road to recovery:
1. Obtain your free credit reports and scores
There are two important reasons to do this:
- To measure success, you have to know where you’re starting from! Your current score will give you a baseline number from which to measure your progress.
- The fastest way to improve your score is to correct any errors on your report. Errors can result not only from clerical or system problems, but also from identity theft. Check your report thoroughly before you do anything else.
Check out our previous post, 5 Questions About Credit Scores You Should Be Able to Answer for more info on how to get your free reports.
2. Pay your bills on time
This may seem obvious, but you’d be surprised how many people pay bills late even when they have the money. Late payments are one of the primary factors that can negatively impact your credit score. The easiest way to avoid this problem is to sign up for automatic bill payment on-line with each payee. But if you’re still at risk for missing payments, work with your creditor before the late payment to avoid having a negative mark recorded on your credit.
3. Pay down existing debt
The amount of debt you carry and the amount of available credit on your open accounts are both factors on your credit rating. It’s recommended that you keep your balance for each line of credit below 35% of your maximum limit. If you need to, consider shifting balances from cards with high percentages to those with low percentages. Also, you can try asking your credit card company increase your credit limit.Of course, these are just small steps you can take now, but the best course of action is to always spend less than you earn. If this is difficult for you, work on increasing your savings rate a little at a time. Continuous improvement should be the goal here. What should you do with the money that you save? Paying off your credit card debt will have the biggest impact on your credit score.
4. Don’t open or close accounts unnecessarily
Although it may seem counter-intuitive you may not want to close existing unused credit card accounts. The credit score calculations compare your actual credit balances with your available credit balances. If you close an unused account, your available balance will go down, and this could hurt your score.But, don’t get tricked into applying for unneeded credit cards either. Frequent credit inquiries can also negatively impact your score. Additionally, new available credit won’t count for as much as your older accounts—score algorithms look at the length of time each account has been active.That said, if you have never had an open credit card account, you may have a “thin” credit file, which can equally hurt your chances of qualifying for new loans. In this case, it may be beneficial to apply for a credit card. Of course, you will want to keep the balance low and pay your bills on time. So, to summarize, these are primary factors that can influence credit scores:
- Length of credit history (how long have you had credit?)
- Total credit available (how much credit is available to you?)
- Credit utilization (how much available credit are you using?)
- Debt balances (how much debt do you have?)
- Payment behavior (are your payments on-time or late?)
- Recent inquiries (have you applied for or opened new credit?)
And the best way to improve your credit is to pay off your existing debt on-time without making drastic changes to your credit picture. It’s admittedly a slow process, but it is achievable if you’re committed.