6 Ways To Increase Your Credit Score
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Have you ever wondered why people care so much about credit scores? It might sound like an arbitrary number, but a credit score is very useful. In the right hands, it can open up a lot of financial options in your life, whether that’s insurance or spending limits. However, while it is beneficial, it can be tough to get a better number. If you’re looking to increase your credit score, here are six ways you can get started!
What is a credit score?
Before you can build on the score, you need to know what exactly it is and why it matters. A credit score is how you show companies and banks your creditworthiness; in other words, it’s proof that you are a reliable credit card user. The score itself can range from 300 to 850. As you can guess, a higher score means a more creditworthy person, which makes companies more willing to trust you in any transaction.
The way you can increase your credit score depends on how you use your credit card. In the first-ever credit score system, the Fair Isaac Corporation (FICO) score, the breakdown of your number was based on these factors:
- On-time payments – this is about how timely your payments are for your credit bill; it’s also the most important factor, as it makes up 35% of your total credit score.
- Credit utilization – this is about how much debt you build up through your credit card transactions. The lower the amount, the better your score will be. This factor is also the second most valuable, as it’s about 30% of your score.
- Age credit – this is about how long you’ve sustained a credit amount. Those with longer tenures, such as 10 or 20 years of use, are typically going to get better scores than newer ones. This factor contributes to 15% of your score.
- Type of credit – this is about what kind of credit options you take in your transactions. For example, you could pay for your house via a mortgage or a home depot card. However, the mortgage will be considered more valuable. This factor contributes to 10% of your score.
- Hard inquiries – this is about the number of times that companies have reviewed your credit history or report. Like the previous one, this factor contributes to 10% of your score.
What are the benefits of having a credit score?
Now that you know what a credit score is and how it works, you might wonder why it’s so important. By proving that you are a creditworthy person, you can get some key benefits in any transaction. Here are a few bonuses you can gain when you have a better credit score.
You can negotiate for loans faster.
With a high credit score, you can negotiate for all kinds of loans and mortgage options on the market. A proven credit history makes companies more likely to offer different payment plans and rates. For example, you could actually negotiate for lower interest rates for a 10-year or 20-year plan.
You can increase your credit limits.
If you increase your credit score, you can also increase the spending limits you have. Credit companies are more likely to give higher limits to those who use their credit cards wisely. That means that if you pay your bills on time and minimize how often you build debt, you can actually put a higher ceiling for your spending.
Also, think of the math involved: if you have a higher limit while spending the same amount, your credit utilization rate will go lower. In other words, you can actually enhance your credit score by raising the limit, instead of spending less.
You have better access to utilities and insurance plans.
While paying in cash or in debit is still a trusted method today, credit has become one of the most reliable ways to cover for utilities. There are many different companies offer credit card payment plans. You can ask your water company, your internet service provider, and your personal insurance services. All of these groups use credit to some extent, and a good credit score can make your payment plans much easier.
You build a better relationship with banks and credit card companies.
A good credit score is one of the fastest and easiest ways for companies to trust you. If you have a proven track record of on-time payments and money management, then you’ll find many new friends. Plus, it makes refinancing applications and loan requests easier to process. After all, these companies need assurance that they’ll be paid back, and a credit score is a perfect way to show them that.
How can I increase my credit score?
Now that you know why a credit score is so important, you’re likely eager to increase your credit score right away. However, you’d also want to make sure that you do it properly. Here are some proven ways to increase your credit score immediately!
1. Keep your old accounts open.
You might be tempted to remove your old debts or credit accounts, especially if you’ve already paid the amount due. However, don’t be so hasty to close them right away. Keeing them open gives a direct pipeline for credit companies to examine your score. In other words, it can act as proof that you’ve got a history for paying your bills. Plus, closing a credit card account can lower your score because it also reduces your credit limit.
Of course, not every account or report should be kept open. If you have bankruptcies or late payments on the account, it can hurt your credit scores. These are the ones you should consider closing, only because of how they’ll reflect on you. For other accounts, especially those paid off on-time, leave them be and you’ll increase your credit score quickly.
2. Pay your monthly bills, even if you don’t cover it all.
Paying your monthly bills, especially for credit cards, is an absolute must. Not only is this the most important factor, but it’s also the most direct proof you’ll ever need. Companies and agencies need to know that you can cover your bills. Paying late or missing them entirely damages your score; in fact, missing out for 140 days can get you reported by the issuer.
Now, you might think that covering your bills in full is necessary. Ideally, you should pay enough to cover the entire debt. However, if you can’t afford the complete payment, you might consider waiting until the numbers align. Don’t do this. Instead, pay what you can, even if it’s not the complete amount. It will still show that you cover your debts on time, even if it’s not complete. It’s better than risking a late payment in 30 days, or even 90 days.
3. Coordinate with friends or family that have extensive credit histories.
You want to increase your credit score but you’re a new cardholder, don’t be nervous. There are other ways you can build the score during the application process. For one thing, you can ask your close friends or family members to open one for you. If they have a long credit history, it can contribute to your score and leave a positive impression. This “piggybacking effect” is a good way of maintaining high numbers without having to spend too many years waiting.
You could also ask these friends and family members to enroll you as a secondary cardholder for their accounts. This way, you can add their credit history into your own credit score and get the results you need. However, remember that this impact is a two-way street; just as they can boost your score, you could also harm theirs. So, if you choose this option, be mindful of how you use your credit card.
4. Choose your credit type wisely.
When you apply for a credit line or account, it’s important to know what kind of credit you need. Every time you do, the company or agency will do a hard inquiry, which lowers your score. Though these deduct your points by a small amount, having multiple hard inquiries can do lasting damage to your score. Many people do this without knowing it because they try to apply for multiple types of credit and credit cards.
So, before you go and apply, make sure to research what type you need. Different kinds of credit accounts offer different advantages and disadvantages. You might not find the same benefits in applying for mortgages as you would for refinancing plans.
If you want to increase your credit score, prepare ahead of time to know what type you need.
5. Keep your credit utilization rate (CUR) manageable.
Your credit utilization factors in how much debt you’ve built up in your credit against how much balance you have overall. In a month, you could be spending enough money to cover 90% of a $1000 credit limit. However, reaching that number is not good. That’s because it shows the companies and lenders that you accrue a lot of debt. Plus, if you have problems paying on time, this debt stays over for the next payment cycle.
To increase your credit score, you need to manage your CUR properly. Try to get it at 30% or lower. Ideally, having less than 10% can be a big boost to your score. Plus, it makes it easier to apply for a higher credit limit, which will help you spend more without risking too much change on the CUR.
6. Use Experian Boost.
Lastly, there are multiple score-boosting apps and programs that can help you build your credit score. One of the best examples is Experian Boost, which allows you to view free credit reports and find possible ways to enhance your score. The program monitors your credit 24/7 and it can consolidate all your accounts and subscriptions. So, if you happen to subscribe to streaming services or digital apps, you can add them all as a part of your credit history.
Through Experian Boost, you can use these maintained apps to prove that you cover your bills on time, which should ideally increase your credit score. Plus, the app can also scan for identity theft risks and issues in insurance or loan plans.
Thank you for reading this article! If you found this helpful, please don’t hesitate to share it with your family and friends. For additional knowledge, you can get a FREE copy of my book, which you can download here. I will share practical tips and tricks for becoming a millennial millionaire!
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