Your credit score is one of the most important factors that determine your financial health. It affects everything from your ability to get a loan to the interest rates you’re offered.
Whether you’re looking to buy a house, finance a car, or simply improve your financial standing, having a good credit score is essential.
If your credit score isn’t where you want it to be, don’t worry there are actionable steps you can take to improve it. This guide will walk you through the steps to boost your credit score over time.
1. Understand What Affects Your Credit Score
Before you can improve your credit score, it’s important to understand what factors contribute to it. Your credit score is determined by several key factors, including:
- Payment History (35%): This is the most important factor. It includes whether you’ve paid your bills on time, including credit cards, loans, and mortgages.
- Credit Utilization (30%): This is the ratio of your credit card balances to your credit limits. Keeping this ratio low is important for maintaining a healthy credit score.
- Length of Credit History (15%): The longer you’ve had credit accounts open, the better it is for your score. A longer credit history shows lenders that you can manage credit responsibly over time.
- Credit Mix (10%): Having a variety of credit accounts (e.g., credit cards, mortgages, car loans) can improve your score, as it demonstrates your ability to manage different types of credit.
- New Credit (10%): Each time you apply for a new credit account, a hard inquiry is made on your credit report. Too many hard inquiries in a short period can negatively affect your score.
By understanding these factors, you can better prioritize which areas to focus on to improve your score.
2. Pay Your Bills on Time
One of the most effective ways to improve your credit score is to consistently pay your bills on time. Payment history makes up 35% of your credit score, so ensuring that your bills are paid by their due date is crucial.
Set up reminders or automatic payments for your bills to avoid missing due dates. If you’re worried about not having enough money to cover your bills, contact your creditors to discuss alternative payment arrangements. In some cases, creditors may offer extended due dates or allow you to make partial payments.
If you’ve missed a payment in the past, focus on getting current and staying up to date from now on. Over time, late payments will have less of an impact on your score, but they can remain on your credit report for several years.
3. Lower Your Credit Utilization Ratio
Credit utilization is the second most important factor in your credit score, making up 30%. This ratio measures how much of your available credit you’re using. Ideally, you want to keep your credit utilization below 30%, meaning you should aim to use no more than 30% of your credit limit at any given time.
To lower your credit utilization ratio, try paying down your credit card balances. If possible, consider transferring balances from high-interest cards to cards with lower interest rates. Additionally, if you have cards with high limits but low balances, try using them more frequently to reduce your overall utilization rate.
Another option is to request a credit limit increase from your credit card issuer. This can lower your utilization rate, but only if you don’t increase your spending.
4. Don’t Close Old Accounts
One common mistake people make when trying to improve their credit score is closing old accounts. While it may seem like a good idea to close accounts you no longer use, this can actually harm your score.
Closing old accounts reduces the length of your credit history, which accounts for 15% of your score. A longer credit history is a positive signal to lenders, so it’s generally better to keep old accounts open, even if you don’t use them often. If you’re concerned about the potential for fraud, consider leaving the accounts open but not using them.
If you’re paying annual fees on unused credit cards, consider asking your issuer to downgrade the account to a no-fee version rather than closing it completely.
5. Avoid Opening Too Many New Accounts
Each time you apply for a new credit card or loan, the lender will perform a hard inquiry on your credit report. While a single inquiry may only cause a small dip in your score, too many inquiries in a short period can significantly lower your score.
Avoid opening multiple new accounts in a short period, as this can signal to lenders that you’re financially unstable. If you need to open a new account, try spacing out applications and only apply for credit when necessary.
Instead of applying for multiple new cards, consider asking your current credit card issuer for a limit increase, which won’t involve a hard inquiry.
6. Dispute Any Errors on Your Credit Report
Errors on your credit report can negatively impact your score. Common mistakes include incorrect personal information, accounts that don’t belong to you, or outdated negative marks that should have been removed. It’s important to regularly check your credit report for errors and dispute any inaccuracies.
You’re entitled to a free credit report from each of the three major credit bureaus Equifax, Experian, and TransUnion—once a year. You can request these reports through AnnualCreditReport.com. Review your reports carefully and file a dispute with the credit bureau if you find any errors.
In some cases, a creditor may also report incorrect information, so it’s a good idea to contact the creditor directly to resolve the issue.
7. Settle Any Outstanding Debts
If you have any unpaid debts that have gone into collections, settling them can help improve your credit score. While settled accounts won’t be erased from your credit report immediately, they will show lenders that you’ve taken responsibility for the debt.
Consider negotiating with creditors or collection agencies to settle your debts for less than you owe, especially if the debt has been outstanding for a long time. Make sure to get any settlement agreements in writing.
8. Consider Working with a Credit Counselor
If you’re struggling to improve your credit score on your own, working with a credit counselor can be a helpful option. Credit counselors can help you create a debt repayment plan, negotiate with creditors, and offer guidance on how to manage your finances more effectively.
Look for a certified credit counselor who is affiliated with a reputable organization, such as the National Foundation for Credit Counseling (NFCC). Avoid credit repair companies that promise quick fixes, as many of these companies charge high fees and make unrealistic claims.
Final Thoughts
Improving your credit score takes time and discipline, but it’s entirely possible with the right approach. Focus on paying your bills on time, lowering your credit utilization, and avoiding unnecessary credit inquiries. Review your credit report regularly for errors and work on settling any outstanding debts. By making these smart financial decisions, you’ll see your credit score improve over time, giving you access to better financial opportunities and lower interest rates.