There are a lot of good reasons to improve your credit score. It can help you secure an apartment, qualify for a mortgage or car loan, and pay less for home and car insurance. I can also help you negotiate better rates and terms on financed purchases. It may even let you access more valuable rewards and perks that often come with credit cards that are targeted to people with excellent credit.
For the first year of the pandemic, some low-income households in the U.S. actually saw credit scores rise. This may have been due to several things. There was an influx of pandemic relief cash authorized by Congress.
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Also, many people had lower expenses thanks to the sudden stop of commuting and business closings that kept folks at home. However, increasing fears of a recession may yet undo some of those gains. And if you’ve been laid off, as so many in the tech sector have been, those financial stressors can do further damage to your score.
If you’re not happy with your credit score, or simply want to try to improve it, first make sure you understand the basics of credit reporting and credit scores. Then take a look at the following 15 strategies to help you reap the benefits of a higher score.
1. Pay your bills on time
While credit scores are determined by company-specific formulas that take into consideration a number of factors, late payments can really hurt your score. So while it won’t give you an immediate boost, and it’s probably not the most exciting strategy on our list, paying your credit card and loan bills on time every month is the single most powerful thing you can do to help you repair a damaged credit score.
Payment delinquencies of 30 days or more may significantly lower your score. This is especially true if there are several such late payments on your credit report. Late payments will also likely result in additional fees and raised interest rates. That means it will cost you more to keep using that credit and may reduce the amount of cash you’ll have on hand to pay down balances.
2. Keep your credit utilization low
Credit utilization is the ratio of credit that you use at any given time to the amount of your total credit limit. For example, if you have a combined total credit limit of $10,000 and you’re carrying total balances owed of $5,000, you have a 50% credit utilization rate.
In other words, you’re using exactly half of the credit that was made available to you. While there’s no bright-line rule here, most experts generally recommend that you keep your credit utilization rate below 30% if you want to improve your credit score.
3. Don’t apply for too much new credit at once
It’s important to shop around for the best deal when you’re about to make a major financed purchase. However, you can actually do some damage to your credit score if you apply for too many new accounts at the same time. More than a few new credit inquiries on your account in a short span of time can constitute a red flag to lenders who may be concerned that you’re a risky borrower.
Note that this only applies to so-called hard inquiries, or actual applications, which can imply uncertain financial circumstances to lenders. Hard inquiries are more significant if you don’t have a lengthy credit history or if you only have a few accounts total. Soft inquiries, which generally include prequalified offers you might receive, will not result in an adverse impact on your score.
4. Dispute errors on your credit report
Credit reporting bureaus and scoring companies aren’t infallible—they often make mistakes. If you aren’t already in the habit of regularly reviewing your credit score and credit reports from all three of the major reporting bureaus (that’s Experian, TransUnion, and Equifax), start doing it now.
Next, review your reports carefully for any errors. If you note any discrepancies—such as accounts listed as still due that you paid off, or payments erroneously marked as delinquent—take steps to dispute those errors as soon as possible.
5. Consider a credit repair service
Legitimate, consumer-oriented credit repair services may help you identify and resolve negative items and errors on your credit reports. However, this is an area that can be rife with fraud, so it’s vital to do your own research, look at independent user reviews, and get personal recommendations from friends or colleagues where possible.
To choose a service or company that’s reputable and transparent, avoid companies that:
- Engage in high-pressure sales tactics
- Request that you pay fees up front
- Promise to get rid of factual negative items from your credit report (that’s not possible)
- Only offers to do what you can do yourself (i.e., review your credit report, dispute errors)
- Urge you to avoid contacting the credit bureaus
6. Use a secured credit card
A secured credit card is one where you make a security deposit in some amount (usually $200 or more). The amount of your deposit then becomes your credit limit. You’ll make purchases on the card just as you would with any other credit card, up to the amount of your limit, then pay those off each month.
If you fail to pay the amount due, the credit card company can access your deposit to satisfy the debt, because the deposit secures their extension of credit to you. It eliminates their risk and is thus an attractive option for borrowers trying to rebuild their credit and raise their scores.
7. Pay off high-interest debt
Remember that any debt you carry that’s tied to a high interest rate is costing you every month that it isn’t paid off in full. High interest debt can cause a lot of financial problems, including making it harder for you to maintain good credit, improve your credit score, and pay down other debt.
Pay off your expensive debt and free up that cash to make full and timely monthly payments as well as reduce your overall debt burden, both of which will help you boost your credit score.
8. Don’t close old credit accounts
It’s tempting to close old credit accounts once you’ve successfully paid them off, especially if they have negative historical events such as delinquent payments. However, closing the account won’t get rid of the past events, and it can actually do more harm than good. That’s because the age or length of your credit accounts is also a factor that companies use to calculate your credit score.
If possible, keep those accounts open with zero or very low balances and think twice before freezing your credit, unless you’ve been the victim of identity theft. That’ll also help improve your credit utilization rate for a further score boost.
9. Don’t max out your credit cards
Maxing out your credit card accounts can not only tank your credit utilization rate, but it also indicates that you’re experiencing financial stress. Lenders will definitely see that as a red flag and may decline credit applications or raise interest rates on existing accounts as a result in order to protect themselves. That can eventually lower your credit score.
10. Use credit responsibly
A credit limit isn’t free money. Whatever you charge, you’ll have to pay back with interest (usually). Sometimes that interest can be fairly steep. Resolve never to charge more than you can reasonably expect to pay off each month. Except in cases of actual emergency, such as medical emergencies or essential car or home repairs, you’re better off using credit for purchases you’d otherwise make in cash.
11. Consider calling your card issuer to close the account
Wait, didn’t we just say not to close out old accounts? Yes, and for the most part that’s good advice. However, there’s a potential exception here. It just requires a phone call to your card issuer, during which you express your interest in closing the account. If you’ve got a history of regular card use and timely monthly payments, your card issuer may offer incentives to keep the account active.
You might get an increase on your credit limit, a lower interest rate for some period of time, statement credits, a reduced annual fee, or other perks. This isn’t guaranteed, but there’s no real risk in calling and asking if there are any incentives the representative can offer to entice you to stay.
12. Maintain a diverse credit mix to improve your credit
A small percentage of your credit score is determined by what’s known as credit mix. This refers to the types of credit accounts you have. For example, your credit cards are considered different types of credit products than installment loans, such as your car loan.
Having both types of accounts represented in your credit reports can help improve your credit score, although probably not by much.
13. Be wary of cosigning for someone else’s loan
Cosigning for someone else’s credit account is a risky proposition. This is often a concern for well-meaning parents and romantic partners who want to help out their loved ones who are trying to build their credit. It’s a commendable impulse, but it can be dangerous for your credit score.
Many cosigners don’t understand that when you cosign for someone else, you’re actually putting yourself on the hook both legally and financially. You’ll be responsible for the full amount if the primary borrower isn’t able to make the payments for whatever reason.
14. Consider using credit-builder products
In addition to secured credit cards, you may also benefit from other credit repair products and services. For example, some services allow you to reap a credit-reporting benefit from paying bills that don’t normally get reflected on your credit history, such as your monthly rent or utilities payments.
Companies may offer free services or charge either the landlord or the tenant, and may report to one, two or all three bureaus, so the outcomes can be quite different. Make sure you research each option before you sign up with one so that you know exactly what you’re getting.
15. Live beneath your means
While spending less money overall won’t directly impact your credit score, it will benefit it indirectly in a number of ways. You’ll obviously experience much less stress when you’re not struggling to pay your bills each month. In addition, you’ll be able to take care of expenses without resorting to credit-financed purchases as often.
And you’ll probably also be able to do things you simply couldn’t before, such as pay down your existing debt more quickly. You may even have room to establish a fund for emergency expenses or negotiate better deals on larger purchases with a bigger down payment.
It can definitely be a challenge to live beneath your means, but the substantial payoffs are usually worth the effort. Remember, no new purchase is likely to feel as good as financial security and solvency!
Article by John Boitnott, Due
About the Author
John Boitnott graduated from UC Santa Barbara with a Masters Degree in Education. He worked for 14 years as a broadcast news writer for ABC, NBC, and CBS News where he covered finance, business and real estate. He covered financial news for SAP for four years. Boitnott is now working as a columnist for The Motley Fool where he covers personal financial and investing strategies.