6 Steps to Improve Your Credit Score

Your credit score has a huge impact on your financial life. It dictates whether or not you’ll qualify for new loans or credit cards, and at what interest rates. Raising your credit score can save you a lot of money, especially when you go to apply for a large loan, like a mortgage.

Follow these steps to make sure your score is as high as it can be before approaching lenders. You’ll start to see score improvement in as little as one or two months.

Know all of your scores.

Experian, Equifax, and TransUnion will all rate your credit slightly differently, and many lenders look at all three scores when evaluating your loan application. Knowing all of your scores gives you a more complete picture of your overall credit. Companies offering 3-in-1 credit reports and scores provide your files from each of the bureaus, but there may be a nominal fee for this convenience. 

Pay your bills on time.

Because your payment history makes up approximately 35% of your credit score, a strong record of on-time payments is key. One missed payment could lower your score significantly. Stay on top of your credit card, loan, and utility bill deadlines, making at least the minimum payments. 

Lower your debt.

Large loans and maxed out credit cards are going to drag down your credit score. Try to keep a low debt-to-credit ratio, meaning that your credit card balances should be only a small fraction of your available credit. For instance, if you have a limit of $15,000, your revolving balance should stay well under $5000. Note that credit bureaus look at both your total debt-to-credit ratio as well as the debt-to-credit ratio of each credit card, so do your best to maintain favorable ratios for both.  

Don’t apply for new credit.

Each time you apply for a new loan or a new credit card, your score drops. This is because it has been statistically proven that those acquiring more credit are a bigger lending risk than those who are not. Signing up for that Macy’s card today may save you 15% off your purchase, but it could lower your credit score which in turn may cost you hundreds of dollars paid for higher interest rates.

Avoid finance companies.

Finance companies are lenders that target high-risk consumers. They serve primarily those with bad credit who cannot get loans elsewhere. They charge high interest rates with restrictive terms. Beware: You may enter into an agreement with a finance company without even knowing it. If you open a line of credit at a furniture or electronics store, for instance, you might be signing on with a third party finance company, as opposed to a traditional bank. Opening an account with a finance company will lower your credit score, so read the fine print before signing.    

Time heals all.

The farther in the past your delinquencies are, the less negative effect they have on your credit score. Sometimes, waiting patiently is all you can do to improve your score. True, if you declare bankruptcy or have a debt sent to collections, it will take between 7 and 10 years for your score to recover. But you can rebound from financial disaster.