Your credit score is what lenders look at to determine your financial health and worthiness as a borrower. Whether you’re applying for a car loan or a mortgage, lenders will look at your credit report to determine how responsible you are at using credit.
Credit scores range from 300 to 850. The higher your score, the easier it is to get approved for loans lines of credit. Having a high credit score also means lower interest rates.
If your credit score could use a boost, there are many things you can do. Here are five smart moves to take to improve your credit score.
The first step is to review your credit report. This way you can figure out areas that you need to improve.
Get a copy of a credit report from Equifax, TransUnion, and Experian. You can free copies once a year by using the Annual Credit Report website.
Once you have the reports, review them to figure out which items are helping and hurting your score.
Credit utilization is how much of your available credit limit you’re using at any given time. This is the second most important factor in determining your FICO credit score.
The best way to keep your credit utilization low is to pay off your credit card balances in full by the due date. If you can’t pay off your credit cards each month, always keep the total outstanding balance at 30% or less of your credit limit.
For example, if you have a credit limit of $10k, keep the balance below $3k or less. This way you can work in dropping the amount to 10% or less, which is ideal for increasing your credit score.
There are several factors that determine your credit score, with each of them having a different weight in determining your credit worthiness. These factors include:
Payment history has the biggest impact. This is why having a record of on-time payments is crucial.
To improve your credit score, start by avoiding late payments. Use automated payments or set up due-date alerts so that you can pay your bills on or before the due date.
If you’ve fallen behind on bills, bringing them into a current status can benefit your credit score. Late payments can remain on your credit report for up to seven years. But, ensuring that all your accounts are current will give your score a boost. Paying your loans fast can help you increase your credit score.
Paying past due accounts also ensures that you don’t have any additional late payments, which are often accompanied by late fees.
There are two types of inquiries that lenders can make when pulling your credit history. A soft inquiry does not affect your credit score. However, too many hard inquiries within a year can negatively impact you score for months, up to two years.
A hard inquiry occurs when you apply for an auto loan, mortgage, new credit card, or some other type of new line of credit. An occasional hard inquiry isn’t a huge deal, but if you’re applying for new credit cards and loans left and right, it will reflect on your score.
Now that you know how to improve your credit score, keep in mind that this is a process that won’t happen overnight. However, by taking these five simple steps, you can increase your credit score by double digits and achieve your financial goals!
What’s most important is that you continue to make smart credit decisions. This way, banks will value you as a trusted borrower that is unlikely to default on a loan.