How to Improve Your Credit Score

Having a strong credit score is a necessary part of adult life, for better or worse. Your credit score is an indicator of the risk you present to new creditors, from lenders to utility companies. Without a solid track record of responsible financial management, including paying bills on time and keeping credit utilization to a manageable level, new lenders and creditors aren’t likely to consider you’re a good candidate for a new account. This could mean denying credit altogether or increasing the cost of new credit by way of the interest rate or other fees. If you’ve struggled with your credit in the past or present, here’s what you need to know about how to improve your credit score.

Know Where You Stand

The first and arguably most important step in improving your credit is to know where you stand. When you don’t have an accurate idea of what is plaguing your credit score and history, you can’t effectively take action to improve your situation. Knowing where you stand in terms of your credit history starts with accessing your credit reports from the three main credit reporting agencies – Equifax, Experian, and TransUnion. These credit bureaus collect information from creditors on your financial history, including amounts owed, payment track record, and negative marks like bankruptcies and court judgments. Although it may seem daunting to look, knowing what’s in these credit reports is crucial to fixing the issues that are dragging your credit score down.

The good news is that getting access to your credit reports is simple. You have the opportunity to check your credit reports from the three credit bureaus for free, once every 12 months. You can either request your reports online through this helpful link, or in writing directly to the three credit bureaus. Take the time to complete this simple step, and see where you may have work to do in terms of improving your credit history.

Strategies for Improving Your Credit

Once you have an idea of what’s in your credit report and what may be impacting your score, you can follow the steps below to get back on track.

  • Get a New Card, or Three
  • Take Out a Loan
  • Maintain a Healthy Utilization Ratio
  • Wait Out Hard Inquiries
  • Remove Credit Errors
  • Stick with a Budget
  • Pack Your Patience

Get a New Card, or Three
Good credit involves having access to credit through different types of accounts, including credit cards. It may seem counterintuitive to open a new credit card when your credit isn’t strong, but credit scoring algorithms give you points for having access to credit lines. If you do not have any open credit cards but want to improve your credit, open three. Yes, three!

Start by searching for credit-building credit cards, such as secured credit cards or options that do not require a strong credit score or history to qualify. Once you have found your three, go slowly forward and open them up over time. Going from zero to three credit cards will over time vastly improve your access to available credit which ultimately leads to an increase in your credit score.

Take Out a Loan
You may also consider taking out a credit building loan to help improve your bad credit. A loan on the books of your credit report helps by showing you can responsibly take on new debt, but it only helps when you successfully make your payments on time each month. Credit building loans do not work as quickly as opening new credit cards in terms of boosting your credit score, but this strategy can work if you’re dedicated to paying on time.

Maintain a Healthy Utilization Ratio
One of the things many people get wrong about improving their credit is using new credit cards to buy everything in sight. Yes, credit scoring relies on you responsibly using your available credit, but that does not mean maxing out the credit lines you have. Experts suggest having a zero balance on all but one credit card. The card that carries a balance should be more than $2 but less than 8.9% of the available credit limit. For example, if you have a $3,000 credit line, you should have no more than $267 as a balance at any time.

Wait Out Hard Inquiries
Taking out new credit when you have less than perfect credit history will impact your credit score negatively at first. This is because hard inquiries – when a creditor pulls your credit information to see if you qualify for a new credit card or loan – drag your credit score down by a few to several points. Having too many hard inquiries can make it difficult to increase your credit score in a short period.

However, hard inquiries are low on the credit totem pole when it comes to credit score points. They stay on your credit for two years and then drop off. Once you have the new credit cards or loans you need, steer clear of applying for new credit to wait out the timeframe for when hard inquiries disappear from your credit report.

Remove Credit Errors
Another way to improve your credit is to remove incorrect information from your reports. Credit reporting errors happen every day, and they range significantly in severity. A credit may incorrectly report a missed or late payment, a wrong address, or an inaccurate credit limit. Each of these can hurt your credit score.

When you pull your credit reports, be sure to take a close look at what’s included in each entry. If there are errors present, follow the dispute process with each of the credit bureaus to ensure the incorrect information is removed. This can be a tedious, time-consuming process, but it is worth it in the end.

Stick with a Budget
Achieving better credit boils down to having strong financial habits, and this includes creating and sticking to a budget each month. It is common to spend money on frivolous things – that may be how you ended up with bad credit in the first place! Overspending can lead to excessive credit card and loan balances that are ultimately a challenge to pay off on time and in full.

Creating a budget based on your income and required expenses each month helps you determine what you can safely spend on desired purchases. Be sure to write these numbers down and check them periodically to ensure you’re staying true to your spending limitations.

Pack Your Patience
Finally, improving your credit score takes a heavy dose of patience. It is not an overnight process, just like getting into credit trouble doesn’t happen in a single day. Whether you are correcting errors on your credit report, taking out new credit cards and spending wisely, or working through the budgeting process, you need to know it will take time to get things back on track. Following these tips starts you down the road to a better credit score, a cleaner credit report, and the financial well-being you need to succeed moving forward.

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