Improve Your Credit Score
The all-important number known as your credit score affects many areas of your financial life. This includes everything from the amount of interest you pay on a loan to prospective job opportunities. After all, the better your credit score, the less risky you appear to lenders.
Your credit score is calculated and determined by a combination of factors, including:
- Payment History
- Length of Credit History
- Types of Credit (Credit Mix)
- Debt Level (Credit Utilization)
- Past Delinquencies
- Number of Inquiries
You may be looking for ways to raise your credit score so you can take advantage of better rates—especially if your current score does not currently fall into the “excellent” or “very good” range. After all, the better your credit score, the less risky your loan appears to lenders.
Unfortunately, there is no quick fix for credit that’s in need of repair. Credit can be wrecked quickly, but it can take months to years to rebuild. However, you can effectively restore damaged credit if you manage it responsibly over time.
The following tips will help you improve your credit score and build a better credit history.
Tip 1: Pay Your Bills on Time
Your payment history makes up 35% of your credit score. Nothing reflects responsible credit history quite like consistently paying your bills on time.
Delinquent or overdue payments can take a chomp out of your credit score. A 30-day delinquency on one payment can shatter your score—possibly up to 100 points.
Typically, liabilities such as utilities, rent, and cell phone bills are not reported to the credit bureaus unless they go into default. When that happens, they are reported as collections, which can also damage your credit considerably. The more recent the collection occurred, the more it will impact your credit score.
Life can get in the way of paying the bills sometimes. Other times, it just slips your memory. If you’ve fallen prey to either of these situations, consider setting up payment reminders that notify you when a payment is due. Alternative- ly, you can enroll in automatic withdrawal from your checking account.
Tip 2: Decrease Your Credit Card Balances
Credit utilization is the percentage of the total credit limit that you are actively borrowing. The lower this ratio, the more responsible lenders perceive your borrowing behavior.
As a general rule, try to keep your overall balance at or below 30% of your total credit limit. For example, if the sum of your credit cards’ limits is $10,000, keep your combined balances at or below $3,000. The same rule applies to cards individually.
A credit card that has a high balance or is maxed out will hurt your credit score. Having more than one maxed-out card hurts your score even worse. Why? When lenders look at your credit report, they will interpret maxed out accounts as risky borrower behavior. It can also become more difficult to repay these high balances—especially if you’re only paying the minimum payment each month.
Reducing your credit card balances to below the 30% credit utilization ratio will help boost your credit score. There are several methods people choose to approach this goal, including:
- Paying down the credit card with the smallest balance first to achieve small victories
- Focusing on the credit card with the highest interest rate to reduce the total amount of interest you pay over time
Tip 3: Be Careful of Opening New Accounts
The length of your credit history reflects your credit behavior over time. Having a long, established credit history (with consistent payments) helps your credit score. It also tells lenders that you keep good borrowing habits over time.
When you add a new account to the mix, the average age of your accounts decreases. A younger average account age signals that you have a smaller account history to gather consistent payment trends from. Unless if you need to, avoid opening new lines of credit.
Tip 4: Keep Old Accounts Open
Closing unused accounts won’t make them disappear. Because the length of your history is a factor in determining your credit score, having a long, established credit history helps to boost your score. It would be most beneficial to pay off your lines of credit, but don’t close the accounts.
Closing accounts can also negatively affect your credit utilization score. Here’s an example situation: One credit card has a credit limit of $2,000 and your total credit limit across all cards is $10,000. Let’s say you keep to the 30% utilization guideline and have $3,000 in debt across your cards. If you close the credit card with the $2,000 limit, your total credit limit becomes $8,000. Your credit utilization ratio now creeps above the guideline to 37.5%.
Now, consider if you paid off the balance in full on that credit card and leave it open. This card’s credit limit will be combined with all your other credit card limits, and nothing will be added to the amount you’re actively borrowing. Thus, your credit utilization ratio is kept lower—which helps improve your credit score.
Time + Dedication to Good Borrower Habits = Improved Credit Score
It’s nearly impossible to rebuild your credit score overnight. It takes times, patience, and dedication to improve your credit score. As long as you don’t have any serious marks on your credit report, such as bankruptcy or foreclosure, you can see improvements in your credit score in as little as a few months by following the above tips.
Have questions about how your credit score might affect your ability to refinance or obtain a mortgage? Call the experts at Meridian Home Mortgage today and start exploring your options.