Chances are, you know what a credit score is. Your credit score is that three-digit number that seems to determine whether it’s going to be easy or hard to get that loan you need — or at least what your interest rate will be.
For some people, having a low credit score might be because they are new to the credit world and haven’t had a chance to establish their credit standing yet. For others, a low score might be due to a few money-related mistakes made in the past.
Whatever the reason for your low credit score, there are plenty of actions you can take to improve your score for better creditworthiness.
Here are six credit-boosting tips to help you get started.
1. Understand how your credit score is determined
While there is no one single formula used for determining a credit score, there are several areas of information presented in your credit report that ultimately factor into your overall score. Knowing what these common elements are will help you know what actions to take — or avoid — to improve or maintain a healthy credit score.
- Payment history: Your payment history includes details about late or missing payments on installment loans, auto loans, student loans, home equity and/or mortgage loans, credit cards, or retail store accounts, as well as information about how much was owed and how many credit accounts may be delinquent compared to how many are open. Additionally, payment history also provides details on bankruptcies, foreclosures, or any accounts that have been sent to collection agencies.
Credit score tip: Be sure to make at least the minimum payment on your various credit accounts by the due date.
- Credit utilization: A credit report will also convey your current credit utilization ratio. Credit utilization is the amount you currently owe compared to how much credit you have available to use. Having credit balances that are “maxed” or nearly at their limit can hurt your score.
Credit score tip: Try to keep your account balances at less than 30 percent of your available credit to help maintain or even improve your score.
- Types of credit: Having a healthy mix of credit types is good for your score. This could include everything from credit cards and department store accounts to mortgage, auto, and other personal loans.
Credit score tip: Responsibly managing multiple types of credit and payments showcases your overall creditworthiness.
- Credit history length: Credit scores also consider how long your various credit accounts have been open and active. As such, avoid opening too many new credit accounts, since those with longer history look better on a credit report and will help build your score.
Credit score tip: Closing accounts can also hurt your score. Instead, transfer any remaining balances to a more active account, or consider using the account for occasional small purchases. Just be sure to pay it off in full.
- Credit checks: Whenever a lender or creditor checks your credit, this is referred to as a “hard inquiry.” While hard inquiries are necessary for obtaining many types of loans and accounts, having too many can impact your credit score. Conversely, checking your own credit, periodic credit reviews, or requests made for a preapproved credit offer are considered “soft inquiries” and do not affect credit scores.
Credit score tip: If you are applying for several new loans or credit types, multiple inquiries are generally counted as one inquiry for a certain period — usually 14 to 45 days.
2. Pay your bills on time
One of the most important factors informing your credit score is your ability to make payments on time. As such, making regular payments on or before the date they are due is among the most effective ways to improve your credit score. As payments are made on time, not only will the responsible behavior be reflected in your payment history, but it will also have a positive impact on your credit utilization ratio, both of which directly influence your credit score.
Credit score tip: Where possible, set up automatic payments from your bank account to ensure they are made on time, and be sure there is enough money in your account to cover the payments.
3. Keep your balances and debt low
While you need to use credit to build credit, it is important to keep the amount of credit you are using lower than the amount of credit available to you. This is referred to as your credit utilization ratio. Essentially, lenders and creditors want to know that you are credit worthy and responsible with the credit you’ve been given. Keeping what you borrow under 30% of what is available to you each month will help you improve your credit score.
Credit score tip: Rather than using your available credit as a limit to what you can borrow, use only what you can confidently pay off each month as your limit, thereby avoiding additional interest charges that may come from making minimum payments on the balance(s) owed.
4. Don’t get lured in by new credit applications
While credit cards can help you build credit when used properly, it’s not uncommon to be bombarded with applications for new credit cards offering a host of enticing rewards, tempting discounts, or impressive free stuff. But try to resist. Many offers come with high interest rates, hidden fees, or penalties. Additionally, every time you apply for a new credit card, a “hard inquiry” is run on your credit, and those inquiries can reduce your credit score.
Credit score tip: If you’re working toward applying for a significant loan (like a home or auto loan) and you need your credit score to be in the best shape possible, it would be advisable to hold off on new credit applications for a while.
