Your credit score affects more than just your ability to obtain an auto loan; it’s used as a factor in your car and home insurance premiums and can be checked by potential employers and landlords to see how responsible you’ve been with your finances. In other words, it’s kind of a big deal.
Why does your credit score matter? Well, the lower your score is, the more challenging it is to obtain a loan or credit card. This can make purchasing a vehicle, home, or covering an unexpected expense a real pain.
If you’ve missed a few payments here or there, or generally don’t have a clue about how to improve your credit score, regardless of where you land on the FICO chart, these quick lessons will help give your credit score a boost.
If you don’t currently know what your credit score is, or if it has been more than one year since you’ve pulled all three of your credit reports, lets start there. Head over to our blog post on 5 Tips for Obtaining an Auto Loan with Bad Credit to get the details on how to pull your credit reports for free and get your credit scores. Or, if you just want to get a quick snapshot of your credit outlook, join a free site like Credit Karma.
Once you know where you sit in the credit world, you can begin to improve your credit score.
Quick Tip #1 – Monitor your credit reports.
This first lesson shouldn’t be a surprise. The largest mistake you can make when it comes to your credit is…not monitoring it. At minimum, you should be pulling your credit reports yearly. It’s free, should take less than 30 minutes to do and is the only way you are going to know if everything is being reported correctly.
Quick Tip #2 – Dispute discrepancies
Review all of the information on your credit reports from Experian, Equifax and TransUnion. Dispute any incorrect information such as accounts that aren’t yours (could be an indicator of identity theft), incorrectly reported accounts, or payments reported as missed when they weren’t. You can do everything under the sun to raise your credit score, but if it isn’t being reported properly, you aren’t doing yourself any good.
Quick Tip #3 – Pay it down.
Want to improve your credit score today? Pay down your debt. Your credit utilization rate is one of the largest factors in determining your credit score. By maxing out your credit cards or keeping high balances on them, and only paying the minimum monthly payment, you are not only telling creditors that you are at higher risk to default, you are also likely paying a lot of money in interest. It is recommended that all of your credit card balances remain less than 50% of your total available, and some experts even recommend as low as 30%.
Matt has a credit card limit of $1,000 and currently has a balance of $848. He is using 85% of his available credit, which is too high. He needs to pay $348 on his card so his balance would be $500 and to get to the 50% threshold. The more he pays down the card, the less he is utilizing, the higher his credit score will go and the better he looks to creditors.
Ideally, you want all of your credit cards to utilize between 1 – 30% of the total limit and pay them off each month. This shows that you need to use your credit cards, but you also have the means to pay them off when the bill comes.
Quick Tip #4 – Open a Secured Card
Credit cards are typically unsecured, which means you don’t necessarily have the money in an account as you are making a purchase. And when stated that way, it almost sounds too good to be true, which can be the problem. Spending more money than you have is an easy way to kiss your credit score goodbye.
Remember the bank has entrusted you with the money and has expectations you will pay them back. Don’t disappoint them! Instead, get a secured credit card, which is one that is tied to your checking account.
If you have $100 in your checking, then that is the limit of your credit card. This is beneficial because it builds your score like an unsecured credit card will. You are still using credit, and since you can only use the money you already have, you should have no problem keeping it contained and paying it off each month.
Quick Tip #5 – Stick to one or two credit cards.
It is not uncommon for people to have more than one credit card. Many people use multiple cards because they feel by putting a little bit here and a little bit there, instead of having all purchases on one card, it will help them keep their balances low. Well, this isn’t so. In fact, having too many open credit cards can not only become difficult to keep up with, but is sure to cause confusion in the long run.
Quick Tip #6 – Eliminate small balances first.
Do yourself a favor and eliminate all of those little balances, as recommended by Bankrate. And then, once they are paid off, stick to one card. This will help you keep organized and in charge of your credit.
Quick Tip #7 – Shop around.
Don’t automatically accept credit card offers that come in the mail. You wouldn’t buy a car without first shopping around, so why would you take the first credit card offer that came your way?
Now, I’m not saying you should blacklist these offers, but just like when you comparison shop for a car, you should shop for your next credit card. Websites such as cardratings.com allow you to search credit cards by category, credit rating, etc. You can then check out reviews and compare cards and see what card offers the best interest rates and rewards, and apply online.
You’re probably wondering, “how can this possibly improve my credit score?” If you have less than two credit cards, then opening a new credit line is a good move for most. Pick your favorite offer, apply for it and use it wisely. This new account adds to the total amount of credit available to you (lowering your utilization!) and establishes credit worthiness. You don’t want to apply for too many cards or get a new card too often, as this will have a negative effect on your score.
Quick Tip #8 – Ask and ye shall receive.
Missed a payment and charged a late fee? Call customer service, dust off your best “please and thank yous” and ask for it to be removed. If you’ve been a good customer and you haven’t had any late payments in awhile, they’ll likely just erase the missed payment and credit you the late fee. Simple as that. A single missed payment on your credit report can drop your score by 10-20 points, so watch your due dates!
Speaking of which – don’t like your payment’s due date? Want your bill to arrive after payday? Call and ask. It’s an option on some cards, but not all.
Want a credit line increase? These are tougher to get nowadays, but if you have a solid payment history and low utilization, they just might give you a bump without having to re-apply. Its recommended that you call and ask for a credit line increase once every 4-6 months. Note: You are simply requesting them to raise your limit without pulling your credit report or score. If they ask you to re-apply, and you do, this will count as a hard inquiry and can negatively affect your score.
Quick Tip #9 – Add an installment loan.
Rarely does adding new debt improve your credit score, but in this case, it often does. An installment loan is simply anything that isn’t a credit card. Student loans, personal loans, auto loans and mortgages are all types of installment loans (although mortgages fall into a different category).
Next to simply paying down your debt, this is the best way to improve your score. Installment loans carry more weight as they are typically for much larger amounts; e.g. a $20,000 auto loan versus your credit card with a $1,000 limit. Showing that you can qualify for and responsibly manage different types of credit is important and sets you up for success for your next major loan, like a mortgage.
Not a student or not in the market for a new or used auto loan? Take out a small personal loan from your credit union or bank, put that money into a savings account and pay back the loan with the same money (plus a little in interest). Although not the best way to establish your installment loan history, it counts.
Quick Tip #10 – Don’t give up.
Be patient. Your credit report and score is updated monthly, so it does take time to start making improvements. You’ll be in a much better place credit-wise a year from now if you make small adjustments now and take a proactive approach to managing and improving your credit score.
Have any quick credit lessons you’d like to share? Let us know in the comments below.