How to improve your credit score
Not long ago, I was asked: Is there is there a way to quickly improve my credit score? The person asking wanted to buy a new car. He “needed” a loan, and the interest quotes were HIGH on any he was eligible for. (That’s one of the consequences of a not-so-great credit score—high interest on borrowed money.) Unfortunately, the answer to his question is “NO.” There is no quick fix. Also, the number of negative comments and how long ago they were reported makes a difference. These tips will show you how to improve your credit score.
improve your credit score it’s easier than you think
Let me explain: If, in the last week, you had a comment appear on your credit report about a bill that was 90 days late, or a bankruptcy, or anything negative, then it’s going to be a while before you can improve your credit score. There is some good news, also: If it’s an old comment, say about an event that took place a year ago, and there have been no problems since, you can be well on your way to improving your credit score.
In my previous article, How to Repair Your Credit, I explained how to remove erroneous information from your credit report. Having the correct information on your credit report is the first phase to repairing your credit. This post is phase two: Improve Your Credit Score. The scoring system goes from 300 to 850 with 850 being the best. There are several things you can do to improve your credit score, and they’re easy. (Note: There is more than one credit scoring system, but they all work about the same. In this article I’m using FICO as a reference.)
How it breaks down
Take a look at the chart below. It will steer you in the right direction to improve your credit score:
35% of your score is based on your payment history. (Do you pay your bills on time?)
30% is based on current debts. (How much do you owe compared to how much credit you have.)
15% is determined by credit history.
10% is allotted to new credit applications.
10% is a consideration of you current types of credit.
Right now, I’m only going to cover the two most important items—payment history and current debt. Those are the two factors over which you have direct control. These make up 65% of your credit score.
35%–Based on Payment History
As I’m sure you noticed, the largest single contributor to your score is your payment history. Do you pay your bills on time? Paying your bills on time is paying (at least) the minimum amount required on or before the due date. A bill that is paid after the due date is late, but credit companies usually don’t report late payments to the credit reporting agencies until they are 30 days (or more) late. (Note the word “usually.” If you want to improve your credit score, don’t count on this practice. Make your payments on time.)
Determine why you pay your bills late and fix that problem
Paying your bills on time is the most important thing you can do to improve your credit score. Here is a suggestion to help you pay your bills on time: Use a budget. A budget is a list of what you need and want to spend money on. A budget will help you organize and empower the use of your money. It lets you know how much you have for spending in each category. Of course, to be effective you need to live within your budget once you have one. When a category is out of funds stop spending money on things within it. This means you have to balance your spending through all categories. A well-planned budget is a necessary tool.
When you have a budget you also need a spending journal. A spending journal is used to track your actual expenditures as they occur. I carry my spending journal with me when I’m on the go. As I make each purchase, I log it in my spending journal. (I also log any electronic purchases I make.) After I get home, I update my budget spreadsheet so I know how much money I have left to spend in each category.
If you need more money
Sometimes keeping to a budget is a challenge. If you’re constantly challenged, you probably need to bring in more money. You may need to get a part-time job or a side hustle. Getting a part-time job is self-explanatory; most of us are familiar with the concept of having a second job to bring in extra money. With that in mind a side hustle is the same thing except you’re your own boss (and have the privileges and responsibilities that go along with that). Find something that other people will pay you to do. Here’s an example: I know a woman who cares for the young children of working families—but only through the night while the parents work the 3rd shift. Yes, occasionally she changes a diaper or gives some kind of care. She also gives them breakfast in the morning before they get picked up. She makes money by letting kids sleep at her house. Lawn care, errand service, dog walking, there are all kinds of things you can do to bring in more money.
30%–Based on Current Debt
What is your credit limit and how much of it are you using? The less credit you use in relation to what is available to you, the better your credit score will be. Here’s an example. Credit card companies and small loan brokers have extended to you a combined $10,000 of credit. If you use $9,000 of that credit, they will believe you are misusing your credit. Why? Because you are so close to your credit limit. That tells the creditors you are either irresponsible or you are living on credit. Neither one of those scenarios is good from their perspective: That you’re using 90% of your available credit puts you at a much greater risk of defaulting on payments than someone who has the same $10,000 credit limit but is less than $3,000 in debt. It’s recommended that you use less than 30% of your credit limit; 10% is the optimal amount.
Important note
Don’t cancel credit card accounts. Cancelling them changes the percentage of debt you are using to the amount of debt extended to you. If you keep in mind what I said in the last section of this post, you’ll understand how counterproductive this would be to your effort to improve your credit score.
Another important note
In some cases you could actually improve your credit score by opening another line of credit. It’s an iffy course of action though. Remember, you are trying to improve your credit score, not acquire more debt. If you open another line of credit don’t use it to make any purchases. Use it to improve the ratio between the amount of credit available to you and the amount you have in use.
Conclusion
This article was inspired by a question about a quick way to improve a credit score. Do you recall the motivation behind the question? The guy wanted to get a loan with a reasonable interest rate. The truth is that if he takes out a loan he needs to use, this person is likely to make his credit score even worse. Do you remember why? –He’ll increase ratio of his debt to available credit. 30% of your credit score is based on keeping the amount of credit you use low in comparison to the amount available to you.
There is no quick way to “fix” your credit score, but you can steadily improve it buy paying your bills on time and paying down your debt. Even if you have negative comments such as bankruptcy and foreclosures, you can attain a good credit score.