5 Easy Steps to Improve Your Credit Score
What are credit scores and why are they important?
Credit scores are an assessment of your personal financial stability. Most people don’t have 40k lying around to buy a car. So the bank will offer you a loan for the vehicle, where they, the bank, will front the cash for the purchase and then you pay them back slowly. (Read about how much you should be spending monthly on auto expenses here.)
But 40k is a lot of money, and not everyone can pay it back the way the bank wants. After all, if you don’t pay back the loan, they’ve just lost money and have to spend more trying to get you to pay up. So before the bank gives you a loan they want to assess the risk they’re taking. That’s where a credit score comes in. Credit scores consider things like:
- Payment history – how often you pay your bills on time, how often you incur late fees, etc.
- Amount you owe – how much do you have to pay back? The higher the number, the riskier it is to lend to you again, because lenders will assume you can’t pay back higher amounts.
- Credit utilization rate – If you have a credit card with a 10k max and you’re only using 3k of it, this shows you’re only using the credit you need.
- Credit Mix – having five open lines of credit and nothing else looks less stable than one line of credit, one mortgage, one student loan account, one car loan and one home equity
- Credit age – how old are your established lines of credit? The older and more stable they are, the better.loan.
- Hard inquiries – When you apply for a line of credit, the lender will “pull” your credit score in what we call a “hard pull” that gets recorded on your credit score. Many hard pulls indicate you’re looking for lines of credit and may not be able to pay them all back.
What’s an ideal credit score?
- 850-800: Excellent
- 740-799: Very Good
- 670-739: Good
- 580-669: Fair
- 300-579: Poor
You can access your credit score for free by asking for a report from any of the three big credit bureaus: Experian, Equifax or TransUnion. Some banks or financial institutions will keep you updated on your estimated credit score as a part of their service.
What steps can you take to improve your credit score?
Steps 1: Pay bills on time
This is the basic and most important thing to do to improve credit. If you make one late payment, the record of that late payment stays on your credit report for seven years. They’re not permanent, which means the longer you go without a late payment, the better your score will become as old late payments disappear from your report. Improving your personal finances can help make this the norm.
Step 2: Deal with or dispute items on collections accounts
You’d be surprised what could be bringing your account down. Maybe an old roommate never paid their final cable bill, but because the account was in both your names, that item is on your credit report. You can dispute items on your credit report, including debt that isn’t yours.
You can either dispute a debt with the collector or with the credit agency. Disputing a debt will not hurt your credit score in and of itself, but the result of the inquiry may change your credit score.
Step 3: Think about a student account or other credit builder program
A credit builder program may start you out with a small line of credit. The longer you go with on time payments, the more credit the institution trusts you with so that overtime, your credit history and utilization shows growth and stability. Or you can try a secured card, where you have to make an initial payment and then can only borrow from that amount you’ve already covered.
Step 4: Get credit for paying rent and utilities
It used to be that only mortgage payments would positively impact your score. Late rent payments would drag your score down, but on time rent payments had no effect. Now, programs with lenders and credit agencies are helping to turn this around by rewarding you for on time payments.
Step 5: Strategically pay down balances
This step is an ongoing process. You might ask, which loan should I pay first, my student loan or my car loan? Ultimately, you need to pay both at the same time. But there can be some juggling you can do. Try to pay off smaller loans first. Think about which loans have higher or lower interest rates–loans with a low, stable interest rate will not cost as much in the long run. Loans with high interest rates could end up costing you thousands more than you intended to spend.
The benefits of having a good credit score
Why care about credit scores at all?
A good credit score will allow you to purchase a car (even a used car, depending on your budget) or even a house. But also, some companies might ask for your credit report as part of the interview process to make sure that you are in good standing. If the position requires money handling or high level clearances, your employers want to make sure they can trust you.
When you go through these steps and raise your credit score, you will have access to lower interest rates, better programs and better deals. It will be easier for you to take bigger steps forward.