Top 6 ways to improve your credit score
It can seem like it takes forever to build good credit but it can be destroyed seemingly overnight. In the first part of this series on credit we discussed what makes up your credit score. If you missed it you can review it here. In this installment we will be discussing six simple yet effective ways that you can improve your credit. While these steps may be simple some require more discipline then others. Following these steps will help you build or rebuild your credit and help you create healthy long term credit habits.
Make your payments on time
This may seem like a simple process but with the busy schedules that most people have it can be a challenge to pay your bills on time. The average person has a minimum of 10 bills to pay each month which means that it is very easy to miss a due date.
Payment history, which reflects your tendency to pay your bills on time, is the biggest chunk of your credit score. At 35% of your total score one late payment can drop your score by ten or more points per missed payment. For this reason you want to make paying your bills on time a top priority. If you find that you have a hard time remembering when bills are due I recommend using a paper tacker that lists your bills and the due dates. You can add to that process a digital calendar on your phone or computer to remind you of upcoming payments. I suggest setting those reminders on 1 week and 24 hour reminder cycles until you get used to it.
Keep your utilization low
Credit cards are extremely convenient. If used responsibly you can even take advantage of free money with benefits like cash back and travel rewards. However if you are like the 58% of Americans who keep a balance on your credit card then many times those rewards are overshadowed by interest payments. Out of the fifty eight percent of people who keep a balance on their cards about 40% pay more than the minimum. That means that a lot of people have a balance that is more than likely above the recommended 30% utilization rate. The utilization rate is the amount of money you have spent in relation to your limit.
The utilization rate is the second largest component of your credit score at 30% and is used to determine how well you manage your spending. Ideally you should pay your bill in full every month but if you are going to keep a balance you should keep it below 30%. While thirty percent is the recommended limit to be considered good, 10% is considered excellent. If you have fallen behind in this area work towards paying your balance down to below 30% on each card and watch your score increase.
Age of Credit
How long you have had credit typically takes time. The only way that you can sort of hack this part of your credit score is by becoming an authorized user on another person’s account. The way that this would work is if a spouse or parent who has established a positive payment history of 5 years or longer adds you to their account as an authorized user. Once they do that their record becomes yours and you now have the benefit of their longer payment history. You will also receive the benefit of their credit limits being reflected as yours so this would help your overall utilization score go down.
While this method can be a great way to improve your credit score, there are some risks for both of you. The fist risk for you is if that person fails to pay this account on time then their negative payment history would become yours as well. If they keep their balance above the 30% utilization then that would bring that section of your score down as well. Also if they give you access to this account and you spend without making payments you will hurt their credit. Which would, in turn, damage your relationship. This credit hack should be done with extreme caution.
Too many inquiries
It is normal to have 1 or 2 inquires per year and you won’t be penalized for them. But if you have more than two in a given year this will bring your score down 10%. Lenders view multiple inquires for credit as a warning sign that you are unable to manage your finances properly. The thinking is that you will acquire more credit then you will be able to safely pay back. This will make you a liability and can hinder their desire to extend credit to you. The exception to this rule is when you apply for multiple things within the same industry within 30 days of each other. In this case all inquiries would count as one. Examples of this would be shopping around for the best mortgage or car loan rates.
Unfortunately there are no hacks for this category. The only thing that will fix this is time. Once those inquires hit your report they remain there for 2 years. Once you have reached the two year mark they fall off and your score will improve. The best course of action is to limit the amount of credit that you apply for. This will keep your inquires low and will keep you from potentially over extending yourself.
Types of credit
Your credit mix makes up 10% of your score and is another category that takes time to build. An example of a healthy mix would be a mortgage, installment loan, student loan and credit card(s). Having none of these will hurt your score as will only having one type. If all you have are credit cards but no other types of credit it may be more difficult to get a personal loan. If you add to this lack of mixture a credit history of less than 2 years then your odds of denial are higher.
I wouldn’t recommend rushing out and getting several types of credit just to boost your score. There are a few things that you can do to boost this area. You can get loan yourself money with Self Lender. This is a program where you would create an account and “loan” yourself money. You can deposit as low as $25 per month into your account. Your positive monthly payments are reported to all three credit agencies and at the end of the term you get all of the money back, minus a nine dollar administrative fee. This is a great program for someone with no credit or who needs to improve their credit.
Painlessly improve your credit
Repairing and/or rebuilding your credit takes time and patience. Consistent monthly payments and spending responsibly may not sound very exciting but they work. The only way to make sure that you will stick to your plan is by creating a system for your success. Many of the things we have discussed can be automated. Set up bill pay from your checking account. This will give you an overview of which payments are going out of your account and limit surprise withdrawals and overdrafts. Creating digital reminders for upcoming due dates will reduce missed payments and fees.
If you need help keeping track of bills, subscriptions, paychecks and more here is a free 9 page budget tracking set to help organize your finances. These sheets will help you keep all of this information in one place and help you improve your credit. Click here for your free digital download.