When I was in my early 20s, I thought of my credit card bill due date as a “ballpark” concept — I actually thought a day late here, a couple days late there didn’t matter.
As you can probably guess, this approach did not do wonders for my credit score, and I’ve worked hard to improve it ever since. A weak credit score can impact everything from your mortgage rates to your ability to get approved for a credit card.
Maybe this story sounds familiar, and you, too, would like to learn how to improve your credit score? Read on for easy-to-follow steps that are sure to help put you on the path to a better financial future.
The first step to improving your credit score is to know what it is. Order a free credit report, as well, and look at the whole report so you’re aware of the factors affecting your credit.
“Not even just in personal finance, but in life in general, a good rule of thumb is what gets measured gets improved,” Steven Fox, CFP®, EA, founder of Next Gen Financial Planning, a financial planning firm based out of San Diego, California, said over the phone.
And while you’re looking your report over, make sure there are no mistakes. The road to raising your score can be as simple as fixing an error on your credit report.
“Filing those disputes and getting those inaccuracies cleared on your report should have an immediate impact as soon as they remove them,” Fox said.
“Your payment history is the single most important factor,” Fox said.
For credit cards, it’s crucial that you pay the minimum amount due every month and on time, but when you can, it’s a good idea to pay more than that or even in full. Getting deeper in the hole is never fun, and neither is trying to dig yourself out (or explaining your debt to those who're close to you).
“The longer past due you are…and the more missed or late payments you have, the more your score is going to be impacted,” Fox said.
One fail-safe approach? “I like setting everything up on auto-payment,” he said. “Unless there’s a solid reason not to, I think everybody should have every bill on autopay.”
Your credit utilization ratio (try saying that five times fast!) is the portion of credit you’re using out of what’s available to you, i.e., your total credit line across all cards. And in order to improve your credit score, you shouldn’t use more than 20% of your available credit.
“Ideally, if someone is really looking to increase their credit score very quickly, going down to 10% of your available credit would move things even faster,” Stephanie Genkin, CFP®, founder of My Financial Planner, based out of Brooklyn, NY, said. Genkin suggested one way to do this besides reducing the amount you’re charging is to increase your credit limit.
All that takes is requesting an increase from your credit card company, though the amount you’ll receive depends not only on your credit score, but also your debt-to-income ratio (how much you owe compared to how much you make), the credit card company’s own guidelines, along with other factors. Fox weighed in on this subject, as well.
“They may not be able to increase it at all, or they may be willing to quadruple it,” he said. I’d suggest asking for double the limit. If you ask for too much, they’ll come back and say you were approved for x amount instead."
It’s a pretty easy process that can usually be done online in just a couple minutes. That being said, be careful not to increase your debt, too.
That card you’ve had forever that you just finished paying off and cant wait to cut up? Hold the scissors.
I know, I know, having one card would simplify things. But you get points on length of credit history, so keep it, but use it sparingly.
“Don’t cut up a national card because what you’re inadvertently doing is reducing your available credit, and now your credit utilization ratio is going to get hurt,” Genkin said. She suggests picking one low monthly bill to put on that card and setting it up to autopay.
“What you’re essentially doing is showing your card is alive and well…you’re using very low amounts of credit that’s available, and you’re paying it off on time and in full,” she said.
One reason this is a bad idea is you don’t want to bring your average account age down.
If you have an account that’s 10 years old, for instance, and you open up a new one, the average age of your account is lowered, which means less assurance that you’re a reliable customer. Sometimes a credit card that offers rewards can be a helpful tool, but don't overdo it.
Another tip is to stay away from store credit cards.
“I’m not one to easily recommend cutting up cards, but the retail cards are evil,” Genkin said. They come with really high interest rates, and they’re only there for you to overspend. She recommends paying these cards off and canceling them.
“The fact of the matter is…they could actually hurt your credit score. And more importantly, they’re really expensive, and usually for stuff you don’t need.”
And remember, no matter your credit score, you can always bounce back.
“I’ve seen many people come back to very nice credit scores,” Genkin said. “Everybody’s given another chance.”
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