It’s easy to see credit as a hole in which it’s hard to escape – but it doesn’t have to be that way! Using credit as a tool can help boost your savings on interest rates, insurance discounts, and provide better loan terms. Here’s how to use credit as a tool, and a few ways you can boost your score.
What Makes Up Your Credit Score?
Before boosting your score, let’s break down a few credit basics and what the credit bureaus are measuring. Basically, credit scoring is a way lenders view how likely you are to repay new money they lend you. There are different credit scoring models, but essentially they each measure:
- Payment History – Have you made all your payments on time? If you were late, just how late? Lenders look at credit history to figure out the amount of risk they take on when extending new credit to you. Missing or making a late payment can stay on your credit history for up to seven years. Also, any closed accounts due to overdrawn funds, debt settlements, bankruptcies, foreclosures, lawsuits, wage garnishments or liens, are undesirable marks from a lender’s perspective.
- Amounts You Owe – Having balances and owing money is not a bad thing, however, if you’re using a lot of your available credit, that can hurt your score. Lenders can interpret high utilization as a higher risk of defaulting. It’s best to keep your credit usage to about 30% of your available credit.
- Length of Credit History – How long have you been using credit? This factor evaluates the length of your oldest credit account. A longer credit history is helpful, if maintained responsibly, but a shorter timeframe can be okay as long as you make payments on time and don’t owe too much. Because length of credit history is a factor in your credit score, personal finance experts recommend leaving credit card accounts open, even if you aren’t using them anymore.
- Credit Mix – Consider your different credit types, such as a mortgage, auto loans, credit cards, or installment loans. Credit scoring tools factor in your mix of credit and that you use them responsibly. It also looks at the total amount of your accounts. This is a smaller component to your score, so don’t open new accounts just to increase your mix of credit types.
- New Credit – When was the last time you opened a new line of credit? New credit factors how many accounts you have, and when you last opened new credit. Any time you apply for a new line of credit, lenders usually do a “hard inquiry” which checks your credit information during the credit review process. Hard inquiries can cause a temporary decline in your credit score. If the scoring model sees several new accounts in a short amount of time, it reads that as a greater credit risk.
How to Boost Your Score Right Now
A few things to help improve your score in the short-term are:
- Pay your bills on time – As mentioned above, a missed or late payment can stay on your score for up to seven years. Since payment history makes up the largest factor in your credit score, paying bills on time is key.
- Carry low balances on credit accounts – Look at your existing balances on credit cards or accounts, and see if you’d be able to start paying down any balances.
- Open additional accounts only as needed - Having a mix of credit types is good for your credit score, and shows lenders you can manage different types of credit. However, too many credit applications in a short period can negatively impact your score. A constant stream of hard inquiries can cause lenders to view you as a credit risk.
- Dispute errors on your credit report – Keeping a close eye on your credit score and credit report will help you know if there are any changes. Additionally, checking your credit score on a regular basis can help you spot any problems that may arise and help you correct them if necessary. A good resource for checking your credit score is by visiting AnnualCreditReport.com.
If you notice any discrepancies or errors on your credit report, be sure to file a dispute with the appropriate credit reporting company – Experian, Equifax, and/or TransUnion. Explain in writing what you think the error is, and include copies of documents that support your dispute. - Watch out and address identity theft – When reviewing your credit report, be sure to look for accounts listed you did not authorize. This can be a sign of identity theft. For more information on disputing an error on your credit report and contact information, check out the Consumer Financial Protection Bureau’s website on disputing an error on your credit report.
Ways to Keep Improving Your Score
After you cover the basics of improving your score , check out these ways to continue improving your score.
- Make frequent payments throughout the month – Making payments outside of your regular billing schedule is a way to help reduce the account balance little by little. Making smaller, more frequent payments can help reduce the interest you pay. It might also fit better into your overall budget, and allow you to pay more on the balance. Plus, if you pay the minimum earlier in the month, and continue making smaller payments, you can avoid paying late fees.
- Ask for higher credit limits – Once credit bureaus receive a lower credit utilization figure, a high credit utilization stops hurting your credit score. In other words, by increasing your available credit, your credit utilization will be lower. If you ask for an increased credit line, be sure to ask if the lender will perform a “hard inquiry,” which could temporally hurt your score.
- Open a credit card account secured by a deposit – A secured credit card can help increase a credit score, or establish credit. Typically, secured credit cards work by you supplying the lender with a deposit, which serves as collateral for purchases you make using the card. Secured credit cards report to the credit bureaus, so you’ll need to make payments on time and keep your account in good standing.
- Become an authorized user of a parent’s credit account – An authorized user is someone permitted to make purchases or use the credit account. If used responsibly, this can be helpful in establishing credit for young people, since it starts building their credit file. If you’re considering adding anyone to your credit accounts, be sure you’re a responsible credit user with a strong payment history and low utilization rate, as any negative implications will have an adverse reaction on your credit score, too.
Benefits of a High Credit Score
Be implementing these tactics, you’ll be on your way to a winning credit score. Along with your winning score and sense of accomplishment, here’s a few benefits that typically come along with having a high credit score[1]:
- Significant savings on interest rates – even the smallest reduction in an interest rate can result in a large amount of savings over the life of the loan.
- Better terms and availability of loan products – borrowers with higher credit scores tend to receive better rates and access to more products, giving you the luxury of shopping around for the best rates.
- Credit cards with better perks and rates – a higher score can provide access to more rewarding cards, including lower interest rates and better rewards.
- Possible insurance discounts – while insurance companies may not turn you down for insurance if you have a lower score, having a higher score could help you qualify for lower premiums on insurance.
- Additional housing options – rental properties or landlords often check a renter’s credit score. Having a higher score could give you more opportunity to be approved for a home or rental.
- Security deposit waivers – some utility companies might consider your credit payment history, and see how likely you are to pay your bills on time. With a high credit score, you may not have to pay a security deposit to initiate services.
Take control of your credit score. If you’re curious where your credit currently stands, our MaxMoney Checking Account* gives you access to your credit report every 90 days with constant monitoring.
Sources:
[1] Why Do You Want a Good Credit Score?, Experian
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