How to Improve Your Credit
- September 30, 2017
- by Emily
Having a good credit score will save you money every time you try to take out a loan, whether it is for a car, a mortgage or to start a business. Getting and maintaining a high credit score is an important part of your financial health. Luckily, it’s not difficult to improve your credit score, and many of the ways to improve your credit score are simply good practice.
Here are a few concrete things anyone can do to improve their credit score.
1. Automate all of your bills
Late payments on any bill, from a utility bill to a loan payment, can negatively affect your credit. Yet it’s fairly easy to get a couple days behind if you are making all of your payments manually. It’s possible to automate just about every type of payment, and doing so makes it that much more likely that all of your bills will be paid on-time.
If you do have some bills that you’ve paid late, don’t stress about it too much. Take the steps to automate your bill payment now, and your credit score will gradually increase as you develop a history of on-time payment. If this has been an issue for you, you should see an improvement in your credit score after just six months of consistent, cross-the-board on-time payments.
If you can wire up the automatic bill payment to a credit card that offers reward points, such as cash back or airline miles, you get an extra boost out of doing it that way.
2. Keep a Good Debt Ratio
It’s a good idea to have and use a credit card (also called a "revolving account") but you don’t want to use too much credit. As a general guideline, try to use only about 30% of your credit card maximum at a time. Creditors consider using a large percentage of your credit card maximum a sign that you’re experiencing financial stress, and that makes you a credit risk.
If you don’t like to carry a balance on your credit card, there is no credit penalty for paying off the entire balance of your credit card every month. If you need to make a large purchase with your credit card (plane tickets for the family vacation, for example) but don’t want to trigger a high credit utilization black mark on your credit report, pay your credit card balance off before the end of your billing cycle, so that your bill will still show a zero balance.
Of course, it’s essential that you never miss a payment, even for a small dollar amount.
3. Review Your Credit Reports
One common reasons for credit problems is actually errors on your credit report. Checking your credit report periodically and contacting the credit rating agency if you find any errors is good financial practice anyway. Correcting erroneous information on your credit report can help your credit score dramatically. Provided as a free resource to consumers AnnualCreditReport.com allows you to view your credit reports from TransUnion, Equifax, and Experian.
4. Keep Old Cards Open, and Use Them
If you’re trying to reduce your credit card use, it’s tempting to start cutting up all of your credit cards. Don’t do that! One of the keys to good credit is having credit accounts that have been open for a long time, allowing you to establish a deep credit history.
If you have a lot of credit cards and need to simplify your accounts, the best strategy for your credit score is to close the newest cards first, leaving you with your oldest credit accounts. Do this judiciously, of course. If your oldest credit cards also have the highest interest rates or otherwise have high fees, it could make sense to accept the temporary hit to your credit score in favor of having better terms on your credit cards.
If you never use your credit cards, your bank might close the account for you. So if you want to preserve your long credit history on your oldest card, make sure you use it.
5. Leave some room for error
In order to avoid late payments coming out of your checking account, always leave a few hundred dollars in the account as a cushion. If your checking account is low on funds it can lead to a bounced checked and resulting bank fees. A bounced check does not directly hurt your credit. However, if an important bill was late because of it your credit rating will be negatively impacted. Most checking accounts have a minimum balance that must be maintained to avoid fees. One approach is to think of that minimum (for example $500) as your absolute floor, and never draw below that amount. That also saves you from paying the monthly fee on the account.
With credit cards, a similar rule applies, always make sure you stay below your credit limit. When a purchase goes over the limit, it may get denied, you will likely get hit with a fee, and your credit score could drop. Knowing the limits of each of your credit cards, how they are used, and their current balances is important. Most credit cards allow you to setup automated alerts that go to your email or phone when a certain balance it hit, a large purchase is made, etc. Taking the time to setup those alerts can help with awareness of where each of your cards are. Consider having one card for all the regularly scheduled bills, another card for monthly spending, and a third card for emergencies.
The bottom line is that most strategies for improving your credit are just best practices for managing your finances. If your credit score is low because of negative information like a credit card that was charged off, you’ll have to wait seven years for the negative information to be removed from your report. However, continuing to get everything else right and maintaining a low debt ratio will help you score improve incrementally as your negative credit information fades slowly in the rearview mirror.