Your credit score is incredibly important for your financial future. A good credit score can help you buy a house or a car, or take out a new line of credit when you need it the most. Unfortunately, if you don’t have great credit, it can really hold you back from achieving your goals.
If you have a low credit score, you’re not alone – many people end up in this position, sometimes due to factors that aren’t entirely in your control. While improving your credit score may seem daunting, it doesn’t have to be. Here are 10 steps you can take to improve your credit score and move towards financial freedom.
What is a credit score and why is it important?
Your credit score is a numerical representation of your credit history. Most financial institutions use the FICO model to determine your credit score. This is a scoring system that was developed by the Fair Isaac Corporation. There are three credit bureaus that process these scores – TransUnion, Equifax, and Experian.
There are a wide range of factors that go into determining your credit score. Some of the most prevalent factors include the amount of debt you have, your ratio of debt to available credit, the number of accounts you have open, the number of missed payments you have, and the number of accounts or bills that have gone into collections.
Inquiries are another factor that can affect your credit score. An inquiry is when anyone looks at your credit report. Inquiries can be divided into two categories – hard inquiries and soft inquiries. Soft inquiries do not affect your credit score, while hard inquiries do. Hard inquiries happen when any financial institution or other third party checks your credit as part of their decision making process. This could happen when a bank is approving you for a mortgage, or a landlord is approving you for an apartment rental.
Soft inquiries happen when a bank decides to pre-approve you for a loan, or when you check your own credit score. Many people mistakenly think they shouldn’t check their own credit score because it will count as a hard inquiry, but this isn’t true. In fact, it’s a good idea to check your credit score frequently so you know where you stand. All three credit bureaus offer free reports at least once every 12 months. You also may be able to access your credit report more often through your bank. Many financial institutions have online portals where you can check your credit score at any time.
Credit scores can range from 300 to 850. A credit score over 670 is generally considered to be very good. Credit scores under 580 are considered to be poor or failing, and can limit your ability to take out loans or make certain purchases. Lenders will take your credit score into account when you take out a mortgage, a car loan, or any type of personal loan. If your credit is poor, you’ll have to pay higher rates. Many landlords will also look at credit scores when deciding to rent an apartment. Those with lower credit scores may have to pay a higher deposit. Some utility companies will even charge an additional deposit for those who have low credit scores.
Having a low credit score can be very limiting when it comes to achieving your financial goals. That’s why it’s so important to learn and take small steps towards improving your credit score now.
Steps to Improve Your Credit Score
1. Don’t close your cards.
Many people think that the first thing you should do to raise your credit score is close any credit cards you aren’t using. However, this can actually backfire and make your credit score worse. This is because it lowers your ratio of debt to available credit, which is one of the most important factors that financial organizations look at when determining your credit score.
Once you’ve paid down a credit card, leave it open and charge a small amount to it every month that you know you’ll be able to pay off. Make the payment in full every month, well before the due date if you can. This will increase your history of on-time payments, which should actually help your credit score.
2. Spread your debt out evenly.
Another way to give your credit score a bump is to make sure that your debt is spread out evenly. For example, if you have four credit cards, make sure you’re splitting your monthly debt among all of them equally, instead of putting all your debt on one card. It’s not just your overall debt to credit ratio that affects your credit score – it’s the debt to credit ratio on each individual card as well. In most situations, it’s better to have multiple credit cards with only 25 percent usage, instead of one credit card with 75 percent usage and others that haven’t been touched at all.
3. Ask for a credit increase.
This is a high risk, high reward strategy, but it could make a huge difference in your credit score if your creditors are lenient. When you ask for a credit increase, your debt to available credit ratio will immediately go up, which can increase your credit score right away. Many banks are willing to grant credit increases to those who have never asked for them before, or during difficult financial times. However, it’s important to be aware of the potential downsides of this strategy. Your creditors may deny you if your usage is high or if you have a history of late payments. They also could make a ‘hard’ inquiry into your credit score, which could result in a slight drop.
4. Make multiple payments each month.
Your credit score is reassessed at a certain point each month. Your lender will report their payment information on a specific date, usually close to the beginning of each month. To make sure that your credit score reflects your progress each month, commit to making two or more payments each month. This ensures that at least one payment will be reported each month. For many people, making multiple smaller payments is less stressful than making one large payment at the end of the month, when you might be juggling a number of other bills. If your bank offers it, consider setting up automatic payments on certain dates each month to make things easier.
5. Set reminders to pay your bills on time.
Your payment history is one of the most important things credit bureaus look at when determining your score. If you want to make a difference in your credit score, you’ll need to make sure you’re paying your bills on time every single month. This includes credit card bills and mortgage payments, but it also includes other bills, including car payments, utility payments, medical bills, and more. If you struggle to remember to pay your bills, set up reminders to do so before they come due. Luckily, it’s easier than ever to set up reminders and automatic payments online or using your smartphone. Be sure to make your payments at least a few days before the due date to account for payment processing times.
6. Check for credit reporting errors.
Credit bureaus occasionally make mistakes that could be negatively impacting your credit score. When you check your credit report, you’ll be able to see any factors that have lowered your credit score, like late payments or bills that have gone to collections. Take the time to check and make sure that all of the information on your credit report is accurate. Make sure to keep records of all of your payments, so you can easily check spot any inaccuracies that come up. If you do encounter any errors, don’t be afraid to call the credit reporting bureau. It’s fairly easy to file a dispute and get the information corrected.
7. Don’t open new credit cards or accounts.
When you’re in the process of improving your credit score, try not to open any new credit cards or take out any new loans. While this will increase your total available credit, it will also register as an inquiry on your credit score. These inquiries can remain on your credit report for up to two years, so you won’t want to make one unless it’s absolutely necessary. Additionally, if you’re having trouble making your existing credit card payments, a new credit card could end up adding more stress and making your financial situation worse.
8. Reduce your spending.
It’s easier said than done, but one of the best ways to increase your credit score is to reduce the amount you spend on your credit card. Try to pay for everything in cash when you can, and only use your credit card for emergencies. Look for unnecessary expenses you can cut out of your monthly budget. For example, are you signed up for any subscription services that you aren’t currently using? Can you make the switch to cooking at home instead of eating out? Can you find quality clothing at a thrift store instead of buying designer? By reducing the amount you put on your credit card each month, it will be much easier to make your payments.
9. Increase your payment amounts.
In addition to reducing your spending, try increasing your monthly credit card payments as much as you can. Take the money that you might have spent on other unnecessary expenses and put it towards your debt – even a few extra dollars every month will help you get it paid down faster. The faster you pay down your debt, the less money you’ll spend on interest as well. If you’re struggling to increase your payment amounts, consider taking on a side hustle to make a bit of extra money. There are plenty of ways to make passive income online these days, even if you don’t have much experience.
10. Look at your credit mix.
One factor that credit bureaus consider is the mix of credit types that you have. Having a mix of different types of credit, like mortgages, car loans, personal loans, and credit cards can actually help your credit score. If your credit score is in a place where you can afford a hard inquiry, you might want to consider taking out a small loan next time you need extra cash, instead of putting the expenses on your credit card.
How long does it take to raise my credit score?
If you have poor credit and need to make a big purchase soon, you might understandably be looking for an easy way to raise your credit overnight. Unfortunately, there’s no easy way to do this. Delinquencies can remain on your account for up to seven years, which makes it difficult to completely rebuild your credit if you’ve hit a low number. However, small changes to your financial habits can result in small increases to your credit score in just a few months. Even a relatively small increase in your credit can make a difference when it comes to taking out a new loan or renting an apartment.
Raising your credit score can be a challenging process, but don’t get discouraged. With a bit of time and financial discipline, you can make significant changes to your credit score. This will improve your access to financial products like mortgages or personal loans. It will also make it easier to make large purchases, like a new car or smartphone. When your credit score is already low, it’s actually easier to make a big improvement in a short amount of time. This is because small changes to your financial habits will make a big difference in your overall score.