We should always strive to be the best version of our financial self. This includes improving our credit score. It’s an important factor that affects just about all of us. As consumers, we are all dependent on credit for many things, from buying vehicles and homes to borrowing for major life events and large purchases. Your credit score is crucial to determining the risk you pose to a lender. This can affect being approved for a loan and the interest rate for which you qualify. In addition to being used when applying for credit, your credit score may also be checked by landlords, insurance underwriters, and even potential employers. So how can you improve a less than stellar credit score? Read on to learn more.
Credit score determining factors
Let’s start by discussing how a credit score is determined. There are five different factors that are taken into consideration when determining a score.
1 Payment history. This is by far the most important factor in determining a credit score. In fact, your payment history accounts for 35% of your total credit score.
2 Credit utilization. This is the outstanding balance on credit cards as compared to your credit limit. To determine your credit utilization, you add up your balances and then add up your credit limits. Divide the total balance by the total limit and you have your credit utilization. Your credit balances should never be more than 30% of your credit limit. People with the best credit scores typically pay their credit card balances in full each month. Credit utilization is the second most important factor, accounting for 30% of a credit score.
3 Length of credit history. Your credit history accounts for 15% of your overall credit score. Credit history is the average length of time you have had your accounts. Long credit history is important to lenders.
4 Credit mix. Believe it or not, it’s not only the balances and bill payment that matters but also your credit mix. Your mix of credit accounts for 10% of a credit score. Lenders like to see that you can manage different types of credit. This includes a mix of revolving and installment credit.
5 New credit. Lenders often take a look at how much new credit you’ve recently applied for. It’s never a good idea to go out and apply for multiple credit cards or other credit all at once. New credit accounts for 10% of your score.
Tips for raising your credit score
You’ve learned a bit about what determines your credit score, so now let’s discuss how you can improve it. Here are some tips to help you focus on raising your score.
- Check your credit report for errors. One negative error can have a significant impact on your credit score. You’re entitled to one free credit report every year from each of the three major credit bureaus. It’s important to take advantage of this and check your report for errors. If any are found, be sure to dispute them with the credit bureaus. You can use annualcreditreport.com to request your free reports. Click here to learn more about fixing errors on your credit report.
- Focus on paying bills. Stay current with your bills. Make all of your payments on time every month. This has the biggest impact on your credit score. Make frequent smaller credit card payments throughout the month to keep balances lower. This will help your payment history, as well as your credit utilization. Consider auto-pay so you never miss a payment.
- Request higher credit limits on your existing credit cards. An increase in credit limit, while keeping balances low, can help your credit utilization.
- Keep balances on credit cards and revolving credit low. Remember, high outstanding balances will hurt your score.
- Keep older credit cards open. Unless you have a problem with controlling your spending or you’re dealing with high annual fees, you should keep your credit cards open. Closing a credit card means you lose that card’s credit limit when your overall credit utilization is calculated. It may also impact your length of history. If you are tired of paying high credit card fees, you may want to explore Benchmark Federal Credit Union’s no annual fee VISA Platinum Credit Card. It’s a great way to replace a card with high fees.
- Keep a good credit mix. If you only have credit cards, consider getting an auto loan or a personal loan.
- Don’t open too many new credit cards too fast or just to increase your available credit. This will impact your new credit as well as the average age of your accounts.
Improving your credit score should be a top priority. Always managing your credit responsibly will help you to build and keep a good credit score. Although you can’t magically raise your credit score overnight, by following the tips above you will slowly see positive movement.