Top 9 Tips to Improve Your Credit Score
Table of Contents
- By David Lukic
- Aug 18, 2020
Unfortunately, in life, it is critical to have a good credit score to qualify for a mortgage, apply for a loan, or get credit cards. If your score is less than perfect or your credit has taken a few hits in recent years, fear not; there are ways to raise your credit score pretty quickly.
What is a Credit Score?
There are three major credit reporting agencies (Equifax, TransUnion, and Experian). Each one is independently owned and operated. They are not connected in any way. These credit bureaus keep track of all Americans’ debt, payment history, and things like foreclosures and bankruptcies. They use all this information to calculate a score (a 3-digit number), which informs lenders of your creditworthiness.
When you apply for a credit card, loan or mortgage, lenders turn to the big three credit agencies to get a sense of how well you pay your bills and how much of a risk it is for them to lend you money. If you have a low credit score, they may deny you credit. You may even be denied a lease to rent the property if you have a low credit score. It is essential to know what your score is, how it was calculated, and how to improve it. The first step is to get a copy of your credit report.
Credit scores range from 300 to 850, and this article from Experian explains how they are calculated. Additionally, here is the table for what good vs. bad credit looks like:
Very good credit
What is a Credit Report?
A credit report is an extensive document that details all of your debts, any foreclosures, and bankruptcies along with your payment history. It also contains details like your name, previous addresses, social security number, date of birth, and other details. Each of the three credit reporting agencies keeps a file on you. Because they are not affiliated with each other, each report may contain different information, and some even have errors.
The FTC is the government entity that oversees credit reporting agencies through the Fair Credit Reporting Act. Through this law, every American is eligible for a free report each year from all three credit bureaus. The credit reporting agencies gathered together and set up a website where you can order yours: Annual Credit Report.com. This is the only website that is approved by the FTC.
Steps to Improve Your Credit Score
First, you need to get a copy of your credit report and review it. Look closely for any errors or fraudulent accounts. To fix those, contact the credit bureaus directly and the vendors who reported the misinformation. You can contact each agency below:
- Equifax: 866-349-5191.
- TransUnion: 800-916-8800.
- Experian: 888-397-3742.
The most frequently seen problem ruining credit scores is erroneous accounts. Take some time to look at each account listed in your report in detail. Even a short review may reveal too many open accounts, or accounts you don't even recognize.
If this is the case, there's probably been a mistake by the credit agency or the reporting party. The problem could be small, such as an incorrectly reported late payment, or it could be a sign of something more dangerous.
Incorrect or false accounts are a strong indicator of identity theft. Criminals may open a new line of credit at a retail store or even apply for something as significant as a business loan in your name. No matter how small, it's best to investigate thoroughly and contact the Federal Trade Commission (FTC) as soon as possible.
Mismatched Personal Information
Data error mishaps can quickly spiral out of control. Misreporting one digit in your social security number can cause the credit bureau to believe you've repeatedly filed for bankruptcy. A bureau may even confuse you for a deceased person.
Obviously, this would dramatically decrease your chances when applying for a mortgage and getting your dream home. Even seemingly benign information like your address or middle name can stall your credit application processes.
Once you have your credit report cleaned up, it's time to improve your score. The top tips for doing this are:
Always Pay Your Bills on Time
Staying on top of your bills and minimum payments is the most critical part of bouncing back from a bad credit score. Late payments severely affect your account's health, and it's easy for one late payment to snowball into many more.
Creditors will offer you worse and worse conditions with every payment you miss. Not only does this hurt your wallet, but it makes it much more stressful and degrades your mental health. Eventually, you may need to face collections, legal action, and bankruptcy, which can stay on your credit report for up to ten years.
Maintain a Balanced Credit Utilization Ratio
The credit utilization ratio refers to how much of your total available credit you're using. It's best to keep a revolving account where you're constantly paying back part of the balance to keep it below 30 percent.
For example, if you have two credit cards with credit limits of $1000 and $1500, your total available credit is $2500. A healthy credit utilization ratio is $750, 30 percent of $2500. So, you never want to use more than that spread across your two cards.
Carrying more debt suggests you can't maintain a healthy balance and can deny your eligibility for credit limit increases. Raising your credit limit also boosts the amount of "safe credit" you have.
Continue Paying Debt but Don't Close Credit Accounts
Closing a credit account without fully paying off its debt will negatively affect your credit utilization ratio.
Imagine your total available credit is $75,000, and you've taken $19,000 as debt. That's a relatively healthy credit utilization ratio of 25 percent.
However, if you close an account with a $20,000 limit before paying its balance completely, you've lowered your total available credit without reducing your debt. This means you have $55,000 while still owing $19,000 in debt. You now have a dangerous ratio of roughly 35 percent.
Also, lenders give positive marks to people with a diverse credit mix, such as cards, loans, and mortgages. Prematurely shutting down an account harms this diversity and could lead to a lower credit score.
Don't Open Too Many Accounts at the Same Time
Whenever you apply for a credit line, it triggers a hard inquiry into your report. Having too many inquiries can damage your score and creditworthiness. At best, the bureaus will think you're shopping around for the best deal, but they may also take it as a sign that you're opening multiple accounts out of desperation.
Avoid opening more than two accounts at once unless it's unavoidable. This is true for individuals in good or bad standing. Focus on controlling your current debt before taking on new and possibly dangerous accounts.
Sign Up for a Secured Credit Card
Secured credit cards are safer versions of the standard credit card. Cardholders pay a security deposit typically equal to the allowed credit limit. This arrangement enables the lender to use the deposit to pay off outstanding debt and take risks on lower credit individuals.
Otherwise, secured cards operate the same way as traditional credit cards. Users borrow and repay the balance, and the activity is sent to the credit bureaus.
Applicants must understand that the security deposit is NOT the same as "pre-paying" on the card. The deposit is an "insurance policy." Holders still need to make timely payments and keep their balance low to boost their credit.
Get On a Trusted Family Member or Friend's Credit
Piggybacking on another person's credit is a great way to improve your standing. Of course, it relies on the other person being in good standing themselves. This practice is known as adding an "authorized user."
The upside of being an authorized user is that your credit score is affected by the primary cardholder's good habits. You'll be rewarded every time they make a timely payment or uphold a strong credit utilization ratio.
Consider a Fraud Alert or Credit Freeze
Fraud alerts are warnings on your credit report. They tell the three major reporting agencies to contact you before opening new lines of credit. Fraud alerts last for a year, but you can set up an extended fraud alert if you provide proof of identity theft.
If you aren't applying for credit anytime soon, we recommend choosing a credit freeze. Freezes are a more complete way of protecting your file. It prohibits creditors from accessing your report until you lift the freeze.
Although a freeze can be "thawed" at any time, it can slow down background checks and credit approval processes. It's perfect for people close to retirement and is a great safety measure for children not independently building their credit.
Sign Up for Credit Monitoring with a IDStrong.com
Constantly watching for errors in your credit report or signs of identity theft is exhausting. It'd require you to check your history after every purchase. Credit monitoring services automate the process and send you convenient text alerts when it detects suspicious activity.
It can scan the web for your personal details, like your social security number or contact information, and pings you for any inquiries you didn't authorize. These warnings let you catch potential problems early and stop criminals from opening fraudulent accounts to begin with.
Rebuilding your credit score won’t happen overnight, but it can change quickly if you take the steps above and stay on track. The months will pass, and suddenly you will realize your credit score has bounced back up, and you are on the path to financial freedom again.