If you’re wondering why you should improve your credit score, well, the short answer is: It is tied to everything you do. It dictates whether or not you’ll land that job you’ve always wanted, or, whether you’ll get approved for a credit card.
If you want to get an affordable rate on your mortgage, insurance premium or even the amount you’ll pay in rent, guess what? Your credit score is a major determinant.
In this article, we explore 7 important ways to improve your credit score especially if it’s previously taken a hit in the past. Read on.
- Scrutinize Your Credit Report
Did you know that the law entitles you to one free credit report every year? Why not take advantage of it.
Download it and examine it with a fine tooth comb. Look out for accounts that you have which may display unpaid bills or any late payments you may have made in the past.
If there’s any accurate information on the report, channel your dispute to the concerned institution in order for them to update their records accordingly. Having a clean credit report plays a major role in determining what your credit score is.
But, what is a credit score exactly? It is essentially a three-digit number assigned to an individual based on their likelihood to repay debt.
One of the major benefits of improving your credit score lies in its ability to land you a job. Most prospective employers consider it part of the recruitment process. It could be the difference between getting the job of your dreams and being turned away at the application stage.
- Improve Your Credit Score by Paying Down Your Balance
Most credit bureaus calculate your credit score based on your credit utilization ratio. This is also sometimes called the debt-to-credit ratio.
It’s not just about how much you owe. But, about how much of your available credit you are using in relation to how much is available.
You might think that if you pay off your outstanding amounts on time every month you’re in the clear. Well, not so much.
Having a credit utilization ratio of less than 30% ultimately has a positive effect on your credit score than say having one of 50%. This is regardless of the fact that you always pay off your credit card bills or loans at the end of every month.
Here’s an example to help paint the picture. Say you have a credit card with a limit of $1,000. Spending $500 of this amount puts your credit utilization ratio at 50%.
This hurts your credit score. You should aim to keep your utilization to a maximum of $300 which is 30% of your total utilization.
- Don’t Wait till the End of the Month to Pay off Your Debt
Here’s the thing. Creditors like Bonsai Finance, for instance, report outstanding balances to credit reference bureaus only once a month.
If it also happens to be the time when you’re paying off your credit cards, you can see how that could potentially put your credit score in a bit of a conundrum. Say for instance that you have a credit card with a $1,000 limit and you max it out in the course of the month.
At the end of the month, you receive your statement and it shows that you owe $1,000. This is also likely the same time the creditor reports your statement balance to the credit bureau.
Even if you settle the amount within a few days of receiving the report, the information will already have been sent out. This makes it look like you always have a 100% credit utilization rate.
If you send in your payments at least twice or thrice a month, it keeps your running balance and credit utilization low by the time the credit bureau receives your reporting statement. This improves your credit score.
- Increase Your Credit Limit
One of the advantages of improving your credit score is that it raises your credit limit. But did you know that raising your credit limit can also improve your credit score? If you find it impossible to pay down your outstanding balances, consider improving your credit utilization rate.
For instance, if you always max out your $1,000 credit card limit every month, call your creditor and ask them to increase your limit to $2,000 instead. This puts your credit utilization rate at 50% which is way better for your credit score than when it is consistently at 100%.
- Apply for a Loan from a Different Credit Financing Institutions
This is yet another way to keep your credit utilization rate low. Remember, credit utilization is calculated based on all the open lines of credit you have at your disposal.
Spreading the amounts you owe over multiple loans or credit cards improves your rating. Don’t apply for too many loans though.
Credit bureaus interpret this as desperation which doesn’t augur well with credit financiers. Have at most three running loans to keep your credit score high.
- Negotiate with Your Creditors to Settle Your Debt
Maybe you went through a bit of a rough patch in the past and your credit score took a hit as a result of the bills you had which went to debt-collectors. While it’s not possible to wipe out these mistakes from your credit report, you can do a bit of damage control by settling them.
Get into a written agreement with your creditors on the amount you can pay that is satisfactory to both parties. This will redeem your tarnished credit rating.
- Ride on Someone Else’s Good Rating
Last, but certainly not least if all the above methods fail and you still can’t raise your credit score, identify someone who loves you a lot. Next, if they have a squeaky clean credit history, get them to add you to their credit card as an authorized user.
You may not be aware of this tidbit, but, this account will show up on your credit report and reflect the principle cardholder’s timely payments. This boosts your credit score as well.
The Bottom Line
While implementing the strategies outlined in this guide will eventually improve your credit score, it’s also important to realize that it won’t happen overnight. Think of it as a marathon and not a sprint to the finish line.
Give it a few months for the changes to reflect in your credit report. Check out our blog for more financial advice.