Boosting Your Credit Score

liftoffI already posted about what makes up your credit score. Knowing what is in your report and how it impacts your score isn’t enough though. Here are some basic tips which will not only help you increase your score, but avoid hurting it as well.

These guidelines will not improve your score overnight.  However, by nurturing these good habits over time, your score will go up. Remember, your credit score is compiled from your full credit report which serves as a snapshot of your financial history. Improving your score will allow you to get credit more easily and at a lower interest rate in the future. 

Check your credit report and dispute any errors.

CE7NB4 Stethoscope and Credit Report, concept of businessThis is pretty straightforward. One of the best ways to avoid a bad credit score is to check your report at least once per year. By periodically checking your report, you’re able to examine it for errors. You can then dispute any discrepancies you find with the reporting agency (Equifax, Experian, or TransUnion). If your identity has been stolen to open up fraudulent accounts, they will be reflected on your report as well.  You can address the problem early on before it further hurts your financial reputation.

Your full credit report from all three major credit reporting agencies can be requested for free once every year on annualcreditreport.com. For a small fee, you can request your full report from the agencies more often. There are a number of free ways to check your report or even just your score, more often. Kiplinger recently posted an article detailing some of these other methods.

Additionally, some credit cards such as Discover IT, Barclaycard, and CapitalOne will provide you with your credit score for free each month. Though you only receive the score and not the full report, you can monitor any sudden changes in your score. This should alert you to pull your full report and examine it for possible causes.

Raise your credit limits.

Raising your credit limit while maintaining consistent spending habits will decrease your credit utilization ratio. This ratio is calculated from your monthly credit card statement balance divided by your total credit limit. This ratio should be kept to less than 30% across all accounts or 50% in any individual account.

If you need to make a big purchase though, don’t worry. Lenders generally report all accounts once per month so in the case of a credit card it would be your last statements balance.  The actual reporting date doesn’t necessarily matter. The point is that if you make a big purchase which puts you over 50% of your credit limit for a single card, you can make a partial payment to your credit card company early to bring your utilization ratio down. Always remember, as we’ve written before, you shouldn’t be making credit card purchases you cannot immediately afford, so this should not be a problem.

Pay your bills on time every time.

Gas-billThis is the simplest method to increase your credit score. In the long run, making credit card and loan payments on time will pay off when you look to get new lines of credit. It’s not a quick fix, but payment history is 35% of your credit score.

Keep old credit card accounts open.

credit-card-stackIt may seem somewhat counter-intuitive to keep unused credit card accounts open, but the length of your credit history is an important factor which determines your financial risk. If you’re in your twenties, chances are, the oldest accounts you have are probably the first credit cards you ever applied for. Closing these old cards will bring down the average age of your accounts and hurt your score. It also has a negative impact of raising your credit utilization.  When you cancel a card, you remove that card’s credit limit which makes your overall credit usage higher. While it’s true that not using a credit card at all can have some consequences on your score, credit utilization and the age of your accounts are more important when determining financial risk.  So cut up the unused cards and let them cancel on their own over time.

Don’t open multiple new accounts at once.

When you apply for a new credit card, loan, or sometimes even to rent an apartment, the lender or landlord will run a credit check on you and pull your credit report. This is called a “hard inquiry” into your credit and will show up on your report.  If you have multiple hard inquiries in the previous 12 months, it makes you look riskier to lenders. It’s best to wait to open a new credit card account if you recently got a new one.

There is an exception to this rule. Multiple auto loan and mortgage applications made within the last 30 days do not negatively affect your score. Prior to this 30-day window, all mortgage or auto loan applications within a short period (14 or 45 days, depending on the bureau) count as a single application. This allows you to shop around for car loans or mortgages without your score decreasing after you go to each bank.

Other negatives to avoid.

expired-parking-meterUnpaid parking tickets, utility bills, even library fines have the potential to actually hurt your credit score. This can happen if your bill is sent to a collection agency. Resolve these payments on time or contact the relevant agency to get a payment extension, to avoid having these bills sent to collections.

Additionally, derogatory marks such as bankruptcy or court ordered payments will show up on your credit report. These items have a big impact on your score and can take years to recover from.

Keep on top of these guidelines and you’ll be on track for a healthy credit score!

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