Credit scores are important – they can impact how much you can borrow, whether you are approved for a new credit card, mortgage, or personal loan, and even what the loan terms are. Therefore, having a good credit score is crucial to show lenders and creditors that you are suitable for the loan terms. But what if your score is less than ideal?
A low credit score may feel like a weight on your shoulders and improving it may seem daunting. However, there are several ways to raise your score; thankfully, they are directly under your control.
First, it’s essential to understand why your score is what it is. Remember, several factors determine your credit score, such as your payment history, credit utilization, and new credit. For example, have you had a period where you made late payments or missed them altogether? Are you close to maxing out your credit lines? Understanding why your score may be low will give you a game plan of how to raise it.
Here are some ways that you can increase your credit score:
1. Lower your credit utilization:
Credit utilization is the ratio of your overall credit balance to your overall limit across all credit lines. As a rule of thumb, a lower credit utilization correlates to an increased credit score. For example, while studies show that those with a credit score of 785 or higher typically have less than a 10% utilization, a “good” percent to aim for if you want to increase your score is 30%. Therefore, you can ask for a higher credit limit, increase your monthly payments, or decrease overall spending to lower your credit utilization. Also, think twice before closing old credit cards, as they contribute to your overall credit limit and can help keep your credit utilization ratio lower.
2. Pay your credit accounts in a timely manner:
The most critical factor in your overall score is your credit payment history. You may think paying your balance is enough, but even late payments can linger on your credit report for years. So even if you cannot make the total amount each month, paying at least the minimum payment on time will help raise your score.
3. Check your credit report for mistakes
About 5% of Americans have errors on their credit reports and finding and fixing these can positively impact your score. If you find a mistake, you need to contact the credit bureau to correct it.
4. Pay accounts that have been sent to collections
Any unpaid accounts sent to collections will wreak havoc on your credit score, so make it a priority to pay these off first. Having no collection accounts on your report will be a promising sign to future lenders when considering whether to approve a loan or not.
A high credit score opens many doors for you, such as better terms on loan products, lower interest rates, and faster credit approvals. Although raising your score can seem challenging, following the guide above can go a long way to getting your score to the range you want.
*DISCLAIMER: this educational article is for informational purposes only. It is highly recommended to consult your financial advisor for financial advice.