Your credit score has some serious repercussions on your finances. By reflecting on your general relationship with money, it indicates to lenders and other potential providers of credit whether or not you will be a reliable counterparty for future transactions. If you find that yours is not where you want it to be, here are seven different actions you can take to improve your credit score that will make you a more attractive client for banks and other financial institutions.
Your credit score is a snapshot in time of your finances, and it can change accordingly once you institute different practices and behaviors. The good news: because it is not static, you have plenty of opportunities to make changes that will enhance your standing.
1. Pay Your Monthly Bills on Time
There are plenty of good reasons to pay your bills on time, such as avoiding late fees, prevent going into debt, or risking losing the services you desire. (Getting cut off from the electricity grid would certainly be a bummer.)
Another compelling argument for making sure your bills are paid on time: this has the largest impact on your overall credit score. Companies will use your credit score to understand if you are a reliable customer or client. Therefore, it makes perfect sense that they want to see if you have been one in the past.
Good financial habits start with being organized and aware of your income and spending. Building a budget is the best way to ensure that your finances are properly accounted for, and that your assets and liabilities are matching. The more that you can automate this process, either by setting calendar reminders or creating automatic bill paying transfers, the better.
2. Do Not Use All of Your Available Credit
Credit cards are designed for convenience. With the swipe of some plastic, you can become the instant owner of whatever your heart desires. However, be aware of how much of a balance you are running up at any given moment to avoid generating a large credit utilization ratio.
A credit utilization ratio is defined as the amount of credit you are using in relation to the overall amount of credit available. For instance, if your credit line is $3,000 and you have made $1,500 worth of purchases, you credit utilization ratio is 50% (equal to $1,500 divided by $3,000).
A high credit utilization ratio signifies that you are pushing your spending limits, which could indicate that you are in danger of not being able to repay your debts. Going over 30% of your credit utilization ratio will negatively impact your credit score.
Even if you have the ability to spend, this does not mean that you should.
3. Take Care of Delinquent Payments
Having delinquent payments is a huge red flag for future lenders. The last thing they want to do is go through a collection agency to recoup their loans, and if you have defaulted in the past they will view you as more likely to do so again.
It can be helpful to get in touch with your lender, who might potentially allow you to work out a payment plan for the monies owed. At the end of the day, their biggest interest is recouping their money, and if they sell your debt to a collection agency this generally comes at a steep discount.
4. Borrow Someone Else’s Credit
Building up your credit can take years. However, there is a short-cut that you can take, by “borrowing” a family member’s credit.
Having a family member add you as an authorized user on their credit card account will allow you to enjoy their credit history, in part. It will not automatically bestow upon you their credit history, though it will be part of the factors that go into calculating your credit score.
The opposite can occur, though, and your family member’s negative credit history would also influence your score. For this reason, it is essential that you only try to adopt this technique if you are confident in your family member’s trustworthiness.
5. Do Not Apply for Unnecessary Credit Cards
When you apply for a credit card or a loan, the issuing company will conduct an inquiry into your credit to see if you qualify.
These inquiries are saved as part of your credit report, and factor into your score. Applying for multiple accounts in a short period of time is a sign that you are in financial difficulty, needing to open multiple lines of credit to pay your obligations. Regardless of whether or not this is actually the case, it will drive your credit score downwards.
While having multiple types of credit lines can help to raise your score–by demonstrating that you are capable of managing more than one account–having too many in short succession is a worrisome sign that you should avoid.
6. Keep Your Old Credit Card Accounts Open
Part of your credit score is based on the accounts you currently have open. One of the components is a calculation of the duration of the longest account you have held, the time you have held your most recently opened one, and an average of all your accounts put together.
If you close your longest-held account, this factor will no longer be part of your calculation. For that reason, even if it is not your primary source of payment, it can be helpful to make smaller transactions using this account on a regular basis.
Keeping these open, in-use, and paid on-time will help improve your credit score. Closing them may bring it down.
7. Review Your Credit Report
Understanding where your credit currently resides will allow you to be intentional with your decisions, while making a plan to improve your score.
It will also give you a chance to see if there were any mistakes. It is always possible that a payment you made on time was marked late by accident. Fraud could also be a culprit, and there is always the possibility that someone else could have stolen your information to open accounts, run up bills, and ruin your credit.
If you spot an error, make sure to dispute these items with the relevant credit bureau which is reporting this mistake. Removing it will help to drive up your score.
Conclusion: Your Financial Record
Your credit score is a report on how you have handled your finances in the past. This impacts how lenders and other financial institutions will engage with you going forward.
This can have a significant impact on your financial future. It will influence the terms of the loans that you will receive, and whether or not you will even be approved for financing to begin with.
There is good news, however, if you are unsatisfied with your current credit score. There are plenty of opportunities for you to improve it.
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