Say you take a gander at your credit score and drop your jaw in disappointment. Or perhaps you’re focused on attaining a perfect 850 (in which case you should consider finding yourself some new hobbies). What now?
Before anything else, you should access AnnualCreditReport.com to review your free credit reports from each of the credit bureaus—Equifax, Experian and TransUnion. Reviewing your credit reports is important for two reasons: (1) you can identify the specific areas brining your score down and (2) you can detect any mistakes in your credit history. If you discover any mistakes, you should contact the credit reporting bureau(s) to dispute the errors as soon as possible. The Federal Trade Commission’s Consumer Information website provides instructions on how to dispute errors on credit reports.
Outside of disputing any errors on your credit reports, here are the easiest ways to give your score a boost:
1. Make your minimum payments on time
This shouldn’t come as a surprise, but you need to pay your bills on time. In fact, this should be your ongoing priority when trying to preserve your credit score. Comprising 35 percent of your credit score, your payment history is the most important input to your credit score. It’s therefore critical that you avoid both late payments and defaulting on accounts. Ideally you will pay your full balance on a monthly basis (more on this below), but at the very least you should meet your minimum payments. Your creditors are allowed to report any payments that are more than 30 days late, so be aware that even one 30-day late payment can dent your credit score. To go a step further, defaulting on your accounts—including bankruptcy, foreclosure, charge-offs and settled accounts—can crush your credit score for several years, so clearly you need to avoid these scenarios as well.
2. Pay down debt
Easier said than done, but paying down your outstanding debt balances is potentially the quickest way to improve your credit score. Meeting your minimum payments and avoiding default is important, but so too is paying down your debt as doing so reduces your credit utilization ratio. Remember, your credit utilization ratio—your current credit used divided by your total credit available—represents 30 percent of your credit score (note that you want a low credit utilization). Thus, reducing your credit used by paying off debt will improve your credit score AND save you money on interest—double whammy!
3. Increase credit limit(s)
This one might be the easiest way to improve your credit score. As mentioned above, you want your credit utilization ratio—which makes up 30 percent of your credit score—to be as low as possible. One way to reduce your credit utilization ratio is to increase your total credit available. This could be as easy as a simple call to your credit card company: a recent survey by CreditCards.com indicated that 85 percent of card holders were able to get a credit increase upon asking. While this is a simple way to increase your credit score, note that asking for an increase to your credit limit may result in a hard inquiry recorded to your credit report, which could have a negative, short-term impact to your score. Nevertheless, as long as you haven’t received an increase to your credit limit recently, it’s worth the request.
4. Consider applying for new credit
Be very careful with this advice: like a double black diamond on the slopes, this advice is tailored to experts only. You don’t want to apply for new credit if you’re behind on your payments or have outstanding debt from month to month. In addition, there’s no use in paying interest on debt just for the sake of increasing your credit score. However, applying for new credit can increase your score by reducing your credit utilization ratio and diversifying your types of credit (a factor that comprises 10 percent of your score). If you only have credit card debt, applying for new types of credit—such as car loans, mortgages, personal loans and other revolving accounts or installment loans—can increase your credit score. Be aware, however, that the benefits to your credit score of applying for new credit can be slightly offset by the reduction in average age of your credit accounts (15 percent of your score) and hard inquiries recorded to your credit report (10 percent of your score), at least in the short-term. More on this below.
5. Avoid closing old accounts
Your length of credit history, including both the age of your oldest account and average age of all your accounts, represents 15 percent of your credit score. Thus, it’s in your best interest to keep your oldest account open, even if you don’t plan to use it. You should also avoid applying for several new credit accounts at once as this can significantly reduce your average age of credit.
6. Limit your number of hard inquiries
Lastly, you want to keep the number of hard inquiries posted to your credit report to a minimum. As a reminder, credit bureaus generally record a hard inquiry to your report every time you submit an application that requires a credit check. Lenders frown upon these hard inquiries, especially in a short period of time, because they can signal that you are in financial distress and searching for loan life support. Because these new credit applications and hard inquiries represent 10 percent of your credit score, avoid submitting several new credit applications at once.
For more information on credit, refer to the following posts: