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Put In The Work To Increase Your Credit Score

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Bill Hardekopf, Contributor Jan. 25, 2022

All adults need to keep a close eye on their credit score, and do everything they can to increase it.

Most people think credit scores only play a factor in determining whether you qualify for a loan. That is, of course, one of its primary uses. Lenders use this three-digit score to assess the risk of loaning money to you. If your credit score is high, you may get approved for a loan at a relatively favorable interest rate. If your score is low, you may not be granted that loan, but if you are, it will be at a slightly higher interest rate. Your credit score impacts many other areas of your life. It can be used by insurance companies to calculate your premiums; by utility companies to determine the amount of your deposits; and by landlords to see if you are a good candidate to rent an apartment. A recent survey by the Consumer Federation of America showed that consumer knowledge about credit scores had steadily declined over the past eight years. It is critical for you to have a basic understanding of what you can do to increase your credit score and make every effort to do so. Regularly Check Your Credit Reports Request a copy of your credit report to make sure the information is accurate. You receive credit reports from the three major credit bureaus: Experian, Equifax and TransUnion. Prior to the pandemic, you could only receive one free credit report per year from each of these three credit bureaus. However, the three bureaus decided last year during the pandemic that consumers could receive a free report every week through April 20, 2022. You can access these reports at . Take advantage of these reports. Review them and immediately report any inaccurate information to the credit bureau. An error on your report could be decreasing your score, so it’s important to carefully study them.

Pay All Bills On Time There are five factors that go into calculating your credit score, and the most important one is your payment history. This accounts for 35% of your credit score. If you are looking to increase your credit score, one habit you must implement is to pay all your bills on time each month. If there were some compelling reasons you were late on some past payments, note that on your credit report. It may not have an effect on your credit score, but it may be helpful when you are negotiating future loans. Commit to making all future payments on time for every bill you receive. When it comes to your credit card bill, it’s very beneficial to pay off the entire balance each month to avoid steep interest penalties. But if you can’t, make at least the minimum payment before the due date every month.

Lower Your Debt The amount you owe is another key factor in determining your credit score; it accounts for 30% of your score. To maximize your credit score, you should use no more than 30% of your available credit. Thus, if you have a $10,000 credit limit available on all of your credit cards, carry a combined balance of less than $3,000. You need to pay down your existing debt as quickly as possible. When it comes to credit cards, the best way to do this is to stop making any additional transactions on your card. Then, put as much money as you can each month toward paying off your balance. The average credit card has an APR of 19% so it is very costly to carry any balance from one month to the next. The faster you lower your balance, the quicker your credit score will rise.

Don’t Close Your Old Accounts You may have a temptation to close your old credit card accounts that have been inactive. However, this can damage your score in two ways. When figuring your credit score, the credit bureaus analyze the age of your accounts and create an "average age" and this accounts for 15% of your credit score. If you close some of your older accounts, the average age of your accounts will drop and your credit score will likely decrease. Closing an old credit card account will damage your credit utilization. If you have two credit cards with a total balance of $4,000 and a combined credit limit of $10,000, you are using 40% of your available credit. If you decide to close a credit card that you are not using which has a $5,000 credit limit, your available credit would drop from $10,000 to $5,000. Your credit utilization would immediately rise from 40% to 80%, just from closing the one credit card. This will lead to a decline in your credit score, and it will take you an even greater amount of time to get to reach a credit utilization mark of 30%.

Don’t Apply For Multiple New Credit Cards You may feel an urge to apply for a new credit card to give yourself some additional payment options. However, if your credit score is not good, it may be difficult to be approved for a card with a reasonable interest rate. In addition, each time you apply for a new credit card, the issuer will make a hard pull on your credit. If you have several of these, your score may decline for a period of time. If you need a new credit card, determine your credit score and only apply for those cards that match your credit quality. That increases the likelihood of approval and fewer dings on your credit.

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