Money Smarts Blog
The beginner's guide to increasing your credit score
So, you realize you’ve been doing this whole adult thing pretty well lately – keeping a job, eating vegetables, paying your bills on time – so you decide to check out your credit score. After all, a good credit score can help you buy that first house or at least rent a bigger apartment, or maybe even take out a loan to trade in that beat up old car you’ve been driving since you were sixteen.
It has to be good, right? You’ve been paying the minimum on your credit card bill, your student loans are being paid on time each month, and your rent is always in your landlord’s hand by the first of the month.
But when you finally check your credit score, you realize it’s not as stellar as you thought it would be. So how do you improve your credit score when you thought you were already doing the right things?
Here’s what you need to know to fix your credit:
Understand what determines a good credit score
Typically, six factors affect your credit score:
- payment history
- derogatory marks
- total available credit
- age of credit history
- type of credit
- credit inquiries.
At a minimum, to establish and eventually increase your credit score, you’ll need a consistent history of on time bill payments, credit that’s available to you but you don’t use (for example, a credit card that has a $5,000 limit but only has a $500 balance), an extended period of responsible credit usage, and minimal credit inquiries (such as when a financial institution checks your credit for a loan).
Pay attention to your credit utilization ratio
Your credit utilization ratio is your total debt divided by the total credit you have available. For example, if you have a credit card limit of $7,500 and you have $2,000 on your card, your credit utilization ratio is around 26%.
It’s important to understand this ratio because it influences your credit score, and the higher your ratio, the more negatively your credit score will be impacted. No matter what credit limit you have, don’t max out your credit card each month. Experts generally suggest a ratio around 30% or less for each account, so keep that in mind as you put new charges on your credit card.
Accept credit limit increases
I can’t stress this enough before elaborating on this point: only accept credit limit increases if you won’t use your new, higher limit as an excuse to spend!
Okay, now that that warning is out of the way, if you pay off your credit card monthly and only charge what you can afford to spend, a credit limit increase can help improve your credit score. It has to do with two things: credit utilization (which we mentioned before) and your trustworthiness as a borrower.
If you have the same $2,000 credit card balance as I mentioned earlier but your card limit is raised to $10,000, your credit utilization ratio drops to 20%. Remember, a lower ratio leads to a higher credit score.
On the other side, the more money a lender is willing to give you is a pretty good sign of how much they trust you. A higher credit limit signals to other creditors that you’re a trustworthy borrower.
Have more than one card
Let me elaborate on this point: Please don’t just open a million credit cards and hope that your credit score will improve.
Just like increasing your credit limit on a card can decrease your credit utilization ratio, having multiple cards open that you have low (or no) balances on can decrease your ratio and demonstrate to lenders that you’re trustworthy.
Credit Karma recommends that, in addition to spreading your charges across multiple accounts, you should make multiple card payments each month. Credit card companies report activity to credit bureaus once a month, and you want to make sure at least one of your card balances is partially or fully paid off to lower your utilization ratio.
Make making payments on time part of your monthly routine
This one may sound like common sense, but it’s so important. If you get into a habit of not paying back debt on time, not only will your credit score take a hit, but your credit history (which will show your string of delinquent payments) will follow you in the future, even if you get your act together.
A perk of making payments on time, every time is that if you do happen to slip up at some point, it won’t have the same negative affect on your credit score as it would for someone who notoriously makes late payments.
According to Kari Luckett, a writer for the personal finance website Clark, “[you] may even be able to call up your credit card issuer and explain what happened to see if they will consider not reporting a late payment to the credit bureaus.”
Use a low interest credit card
If your credit score isn’t high enough for you to take on a loan and you want to build your credit for the future, apply for a low interest credit card and spend responsibly.
When going this route, make sure to still follow all the above advice to make sure that you develop healthy credit habits and continue to improve your score.
The good news about your credit score is that there are several things you can do to increase it. Identify which factors are attributing to your less-than-ideal score, start making some changes in those areas, and watch your credit score increase. It’s not as scary as you think, and trying some of these suggestions will only lead to improvements, so what’s the harm?