The credit score. A subject that can create feelings of great pride, immense shame or total confusion. Some of us monitor our credit scores with the same rigor the paparazzi display when monitoring celebrities. Others avoid viewing or discussing our score like it’s the plague. Still others have no clue what it is, why it’s important and why some of us care so much (ignorance is bliss, right?). There are many reasons why we should try to improve our credit:
- Easier approval when renting/buying a home
- Better car insurance rates
- Avoid those pesky security deposits on utilities
If you feel that it’s time to take charge of your financial future, then read on for 5 simple steps to help improve your credit score.
#1 Keep old cards open
How many of us have had trouble with a credit card and swear that, as soon as it’s paid off, we will cancel it for good? This may seem tempting so we can avoid future trouble, but it may cause more harm than good. Closing a credit card does two things. First, it reduces our credit utilization ratio, which is the percentage of available credit we are using. Second, it reduces the length of our credit history. Both a lower credit utilization ratio and shorter history can hurt our scores. My advice, pay off the card causing trouble and lock it in a safe or store it somewhere secure. Make small charges a few times each year to keep the card active and let your credit grow.
#2 Look for errors
Imagine it’s a beautiful spring Saturday morning, you sit down with a coffee and…your credit report. Seems like a dull finish, right? If improving your credit is on your to-do list, this might be a great way to start a Saturday. The credit bureaus that calculate our scores receive information from outside parties regarding our loans. It’s unfortunate, but mistakes do happen. Reviewing your credit report at least once a year can help you identify errors. Once an error is spotted, report it immediately and file a dispute with the appropriate credit bureau. Request your free credit report and enjoy a little light reading to help improve your credit!
#3 Pay off big credit card balances
This may seem obvious when trying to improve your credit, but let me provide some clarity as to why it’s important. Your credit utilization ratio shows how much of your total credit you are using. If the limit on all my sources of credit is $20,000 and I have a $10,000 balance, then my utilization rate is 50%. It is recommended that we keep utilization ratios at or below 30%.
This ratio is the second largest factor when calculating our credit scores, so it’s very important to keep it low. My advice for those of us who use our cards frequently is to start making bill payments twice per month. Why? Your outstanding balances are only reported once per month to the credit bureaus. If they are reported before a payment is made your score could suffer due to a higher outstanding balance, even though you intend to pay it off later in the month.
#4 Become an authorized user
To become an authorized user you will need someone, usually family or a friend, who will add you to their account. This is a HUGE risk for the other person, so it’s critical that they know you are trustworthy. They should also understand why you want to be an authorized user and have a strong desire to help you. Once added to another person’s account, their good habits begin to help improve your score. As they make payments on time and maintain a great utilization ratio, your credit score will get a boost! This is because their account will show up on your credit report since you are an authorized user. This isn’t a request or responsibility that we should take lightly. We must be sure to validate the other person’s trust in us and not abuse the opportunity we have been given.
#5 Increase your credit limit
Sometimes it just isn’t possible to pay down a large balance quickly. We already know that a large balance hurts our utilization ratio. Increasing our limit could provide some relief for our scores. Requesting and receiving an increase to a credit limit will reduce the utilization rate, but you must be sure not to spend up to the new limit. Be careful if you decide to go this route. When a credit limit increase is requested, the credit card company will have to pull a credit report. This will leave a hard inquiry, which can drop scores by a few points. If the request is approved it will be worth while, however, if denied it could do more harm than good.
That wraps up the five simple steps to improve your credit. I know reading the above steps and actually doing them are two different things. The reading part is easy, the doing will be more difficult. However, with a little effort and determination we can all improve our scores. Now it’s your turn to chime in. Do you have experience using any of these steps to improve your credit? Let’s start a conversation in the comments below.
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