Building and maintaining a respectable credit score is one of the hallmarks of entering financial adulthood.
With a good credit score, you can qualify for the best loans at the lowest rates.
But how do you actually earn a great score? If you don’t know what to do, it’s easier to end up with a poor credit score than a good one. If you’ve experienced this first hand, you might be wondering how to improve your credit score.
There are plenty of places that offer to improve your credit score for you, but you can increase it all on your own. In fact, a DIY credit repair approach is a great learning opportunity. The core principles behind a good credit score are also good money management principles in general.
Why You Want to Improve Your Credit Score
A credit score is more than just a debt-related report card for grownups. A good chunk of your financial life is dictated by your credit score. Here are a few reasons why building a strong score is worthwhile:
You may not need credit now. However, you may at some point in the future, like if you want to buy a house or take out a loan for an emergency. When that time comes, it’s better to have a good credit score so you can qualify for the best loans.
If you have a low credit score, you may be declined for those same loans. Poor credit is one reason why many people resort to alternatives like payday loans. These often coincide with predatory lending practices and can do even further damage to your credit if you aren’t able to repay the high interest fees.
Aside from being approved for loans in the first place, it’s better to be approved for loans at the lowest interest rates. The difference of a few percentage points may not seem like much, but consider something like a mortgage.
Let’s look at a 30-year, $500,000 home loan. If your interest rate is a relatively low 4.5% interest rate, you’ll pay $412,033.56 in interest by the time you pay off the loan. If you have a poor credit score and a 7.5% interest rate, you’ll end up paying $758,586.12 in interest over the life of the loan. That’s $346,552.56 more with a difference of just 3%.
Getting a Job
Did you know that many employers will check your credit report as part of the application process? This is especially true if you’re in a position where you’ll be working with money and budgets.
The last thing you want to do is be cut out of a good job because your credit score isn’t up to par.
7 Ways to Improve Your Credit Score
Ready to learn how to improve your credit score? Most of this advice boils down to good financial management skills. Here’s what you can do:
1. Monitor Your Credit Score
According to an FTC survey, 25% of Americans had an error on their credit report. Even worse, 20% of those people had an error that could hurt their ability to get a loan.
That’s why it’s a good idea to always keep an eye on your credit. There are many paid credit monitoring services out there, but you can do the job yourself for free by checking your credit report at regular intervals.
You’re allowed one free credit report from each of the three credit bureaus every year. Your report is accessible via AnnualCreditReport.com. If you stagger these check-ins throughout the year and mark it on your calendar — once every four months — you can watch closely for any errors. You can also use Chase Credit Journey or Credit Sesame to notify you when there are changes to your credit report.
2. Pay Bills On Time
The best thing you can do to help your credit score is to avoid late payments. That’s because a full 35% of your credit score is determined by your payment history — more than any other factor.
In order to avoid making a late payment, you can:
- Set your bills to autopay
- Write the due date on your calendar
- Save up one month’s worth of expenses, so you’ll always have enough to pay
3. Dispute Previous Negative Remarks and Incorrect Late Payments
If you do find an error on your credit report, don’t freak out. You can actually dispute the error with each of the credit bureaus.
Once you dispute a mark on your credit report, they’re legally obligated to investigate and remove the mark if it’s found to be invalid. You can contact each of the three credit bureaus here:
4. Lower Your Credit Utilization
“Credit utilization” refers to the percentage of available credit you’re using. For example, if you have two credit cards with a total limit of $10,000 and a balance of $500 on each card, then your credit utilization ratio is 10%.
The lower your credit utilization ratio, the better. Many credit experts recommend keeping it at under 30%.
You can improve your credit score by lowering your credit utilization ratio since 30% of your score is determined by that factor alone. This is one of the easiest ways to increase your credit score. You may even see a boost as soon as you pay down your debt.
5. Know When to Apply for More Credit
Your “credit mix,” or the types of credit you have, makes up 10% of your overall score. This isn’t a big factor, but you can boost your credit score further by carrying a mix of different types of credit.
Having revolving accounts (e.g. credit cards) and installment accounts (e.g. student loans or mortgages) can increase your credit score. Likewise, having multiple accounts of each type can increase your credit score, although the “perfect” number will differ for everybody depending on their overall credit picture.
6. Reconsider Closing Old Credit Cards
Your credit history, or how long your accounts have been open, makes up an additional 15% of your credit score. With installment loans like auto or personal accounts, your loan will have a set lifespan. Credit cards, on the other hand, are revolving accounts, which means you can keep them open indefinitely so long as your account is in good standing.
That’s why it’s a good idea to reconsider closing any old credit cards you’re no longer using. As soon as you close them, your credit history will shorten and your credit score may see a dip. As long as your card doesn’t come with an annual fee, consider keeping it open and using it every so often to keep the account active.
7. Keep Hard Inquiries to a Minimum
If you need to take out a loan, you can often check your rate with different lenders for free. This generally results in a “soft credit check” or a “soft credit pull,” where the lender gets access to a limited version of your credit report. These don’t harm your credit score.
Once you’re ready to apply for a loan, the lender may require a “hard credit check” or a “hard credit pull.” In this case, the lender gets full access to your credit report, and it will be recorded on your credit score.
The downside here is that your credit score drops a bit with each hard inquiry, so it’s a good idea to wait until you really need credit to apply with a lender.
If you’re shopping for an auto loan or a mortgage specifically, you can check your rate via hard inquiry with multiple lenders and not be penalized, as long as you do all your rate shopping within a 30-day period. In this case, all the separate inquiries will be treated as a single inquiry on your credit report.
You Can Improve Your Credit Score Yourself
Just like more money means more options, a good credit score means more opportunities. While earning a good credit score can seem complicated and confusing at first, it is absolutely possible to do it yourself.
Even better, the things you do to set yourself up for a healthy credit score will also set you up for a healthy financial life. By paying your bills on time, maintaining low balances on your credit cards, and keeping an eye on your credit score, you’ll be well on your way to a brighter financial future.