How Do You Improve Your Credit Score?
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There are many things you can do to level up your finances. One area you can focus on that will help across the board is to improve your credit score. Having a good credit score saves you money and gives you more options. It can help you get better loan interest rates and pay less for insurance. It can also give you more housing options, the ability to rent without a cosigner, and you can sometimes even get security deposits for things like utilities waived. But where do you start? Here are six things to work on if you want to improve your credit score.
1. Pay Your Bills on Time
Paying your bills on time is a huge way to improve your credit score. Keeping up with your monthly payments shows lenders that you are a good risk. It also demonstrates that you manage your money well and don’t overextend yourself. In the FICO Credit Scoring system, payment history accounts for 35% of your overall credit score. So, paying your bills on time can have a big impact as you work to improve your credit score.
2. Have a Credit Card
Credit is one of those things that you can’t build unless you have it. The easiest way to establish credit is to get a credit card and use it responsibly. Fifteen percent of your FICO credit score comes from your overall length of credit history. Getting a credit card and making on-time payments can improve your credit score.
3. Keep Your Account Usage Low
Another thing you can do to improve your credit is keep your credit utilization low. When lenders and credit card companies look at your credit utilization ratio, they look at how much of your available credit you are using. To do this, they compare your total outstanding balances across all your cards to your total available credit. Ideally, you want to keep this ratio below 30%.
That means if you have one credit card with a limit of $1,000, you don’t want to carry an outstanding balance of more than $300. The best way to keep this ratio low is to pick a few expenses you’ve budgeted for each month, charge them to your credit card, and then pay the balance in full each month. This allows you to keep your credit usage low.
4. Don’t Default on Loans
Just as paying your bills on time helps your credit score, so does paying your loans and not defaulting on them. Defaulting on a loan can stay on your credit report for 7-10 years. Sometimes a default occurs after the first missed payment. It can also occur after several missed payments, depending on the terms of the loan. These missed payments will negatively impact your credit score. So, keeping up with your loan payments will help you improve your credit score.
5. Have a Good Credit Mix
When building and improving your credit score, it’s important to maintain a good mixture of credit. This means that you want to have both installment credit (loans) and revolving credit (credit cards or charge accounts). Your credit mix accounts for 10% of your FICO score. It indicates to potential lenders how well you manage your money and whether or not you can meet your monthly financial obligations. While it is good to have a mix of credit, be sure to only borrow or charge what you can afford to pay back.
6. Open New Credit Sparingly
Another thing that can help improve your credit score is only opening new credit when you need it. This can help you avoid opening several new accounts all at once. Opening too many new accounts in a short period of time can lower your credit score and can also make you look like a risky borrower. Open new credit only when you need it and be sure to factor repayments into your budget.
Improving your credit score takes time, persistence, and patience. But it is possible! Be sure you understand what determines your credit score, know how your actions affect it, and recognize what you can do to change it. If you use your credit mindfully, pay your bills on time, and don’t spend more than you can afford to pay off, over time you will see your credit score improve. This will give you more opportunities and access to better interest rates as you move forward.
This series on building credit is brought to you in partnership with United for Financial Health powered by Experian. Sign up for SaverLife to earn points and enter to win cash prizes for reading about credit and taking quizzes to test your knowledge.