The importance of a good credit score cannot be overstated. Of course, most people know that these scores have a major impact on their finances. They determine your eligibility for loans, housing, and insurance.
The influence of a credit score stretches beyond purchases and lending, though. Credit checks can be a part of the hiring process, so your score may even affect your employment.
From late payments to closing accounts, there are a number of factors that can impact your credit score. If you want to breathe new life into your score, consider these five tips.
1. Get a Secured Credit Card
If you have poor credit or a short credit history, then a secured credit card might be for you.
A secured credit card works like a typical credit card except you pay a deposit when you open your account. That deposit typically becomes your credit limit. The initial deposit also acts as security for the card issuer. If you default on your payments, the issuer can take money from this deposit.
There are a few ways for you to get the most out of this credit-building tool. First, keep your spending rate low. Instead of using this card to pay an expensive bill, use it to make smaller purchases throughout the month. Another way to take advantage of this card is to pay your balance in full each month. This helps you avoid interest.
Following these basic rules can help increase your credit score. After all, your good payment habits will be reported to the credit bureau.
2. Keep Your Credit Utilization Low
As tempting as it may be to use all your available credit, don’t. When it comes to credit cards, it’s best to keep your credit utilization rate low. Your credit utilization rate is the amount of credit you’re using divided by how much you have available to you. The less credit you use, the better your score will be.
It’s often recommended that you keep your credit utilization at 30% or lower. So if you have a $2,000 limit, you should keep your balance under $600. Maintaining a utilization rate of 30% will help you improve your credit score. And a lower rate is better still.
Thankfully, there are a couple ways you can drive that utilization rate down. If you have a fairly good credit score, you can increase your available credit. You can also make your credit card payments multiple times a month. This can help you maintain a balance that’s more manageable for you.
3. Polish Your Payment History
Payment history makes up 35% of your credit score. If you have a habit of making late payments, your score is probably paying the price.
One of the best ways you can improve your payment history is by — you guessed it — paying your balances on time. Sometimes this can be difficult to do, especially if money is tight. If you’re struggling to make payments, create a budget. This will help you stay organized, and it will determine what you should prioritize.
If you want to improve your payment history and overall score, dig into your missed payments. Did you find any outstanding balances you’ve been avoiding? Try to pay them off entirely. Once you do, your lender will note the balance as “paid in full,” and your credit score will increase.
It’s important to tackle overdue bills because delinquencies can stay on your report for around seven years. If you need help managing your payments, consult a credit counseling service to assist in budgeting. Remember that payment history has the largest single impact on your score, so be sure to address those late notices.
4. Keep Existing Accounts Open
If you have a credit card with an unpaid balance, you might be tempted to close the account. After all, if the card is causing you to overspend, you may decide it’s best to remove the temptation. Closing it would also enable you to avoid an annual fee (if the card carries one).
However, pulling the plug on the account may hurt your credit score. The amount you actually owe will stay on your credit report until you pay it off. Making payments when the account is closed doesn’t benefit your score, especially if it takes a while to pay it in full.
Furthermore, closing the account will reduce your amount of available credit, thus increasing your credit utilization rate. If you keep the account open and pay the balance off in a timely fashion, your credit score will be better off.
Even if you don’t have a balance on your card, closing the account might still be the wrong call. To get the best credit score, you want to maximize credit history length, which makes up around 15% of your score. Closing an account is the financial equivalent of an “own goal.”
The longer you keep your accounts open, the more your credit score can improve. So don’t close existing accounts — not even the ones you took out just for their great sign-up bonus.
5. Talk to Your Creditors
Life happens, and sometimes we fall behind financially. Surprisingly, even some creditors understand this.
As much as you might want to avoid them, you should give your creditors a call if disaster strikes. Be honest about your situation. If you recently became unemployed or had another financial emergency, let them know. Some creditors have programs that can reduce your payments or interest rates until you get caught up.
A phone call is likely worth the aggravation if it will save you money and a plummeting credit score. Explaining your situation can prevent you from falling behind on payments. In the long run, that will help you boost your score.
There are many factors that affect your credit score. As you work on making improvements, remember to be patient. Rebuilding your score isn’t something you can do overnight. And you can’t create a perfect score from scratch.
Credit building takes time and effort. Financial planning and communication can help you get started. Ultimately, a higher score will be worth the effort.