Improve your credit score with these 5 tips
Your credit score impacts a variety of aspects of your life. A low credit score can affect your housing options, job opportunities, and negotiating power, which is why achieving and maintaining good credit is crucial.
A number of factors determine your score. Your credit history, utilization ratio, and credit types all play a role. In this article, we will explain what you can do to improve your credit score. It’s important to remember that your credit score may have taken many years to build and may require time and patience to rebuild.
1. Utilize your credit
To start, it’s important to use credit if you intend to build credit. It might seem counterintuitive to borrow money if you’re trying to prove your financial responsibility, but what you’re really showing is that you’re actively managing your credit.
You should try to keep your total balances under ⅓ of the aggregate available limits for all of your revolving accounts, including credit cards, preferably at less than 10%. (See “Know your loan types” below for more info about revolving credit.)
You don’t need to spend unnecessary money here; an easy first step is to pay your everyday expenses with your credit card rather than with a debit card or cash. For example, gas, utilities, and groceries are great monthly expenses you can charge to a credit card and pay back swiftly, thus increasing your score. Of course, this assumes you’re budgeting accurately and setting aside funds to make payments. For some people, losing track of regular expenses charged to their cards can be easy.
If you plan properly and continue to watch your monthly charges, this is a great way to start rebuilding your credit.
2. Make timely payments
It may sound obvious, but making your payments on time is an important step toward building your credit.
When you miss a payment, you’re sending a message to lenders that you may be an unreliable borrower. Your payment history is a strong indicator of the type of borrower you will be, so it accounts for 35% of your FICO credit score.
You should only make charges on your credit card if you’re certain you can pay them back. Be aware of your payment deadlines and pay them on time.
Some institutions let you set up automatic payments with digital banking, reducing the chance of missing a payment. With First Tech’s digital banking, you can view your bills online, make payments, and automate future payments all in one place. No need to log into different payment portals.
3. Limit requests for new credit
Every time you apply for credit, the lender will perform a credit check – and this credit inquiry can lower your credit score. They do this because when people are having trouble managing their finances, they may take on more debt to make ends meet. The more debt they have, the harder it is to make payments on time.
You should be cautious when increasing any of your credit limits. It’s best to work within the credit lines and limits you already have. If you must increase your limit, we encourage you to track your use as discussed above. For some people, an increased limit allows them to feel like they can spend more, so it’s best to act with caution and show potential creditors that you’re capable of managing your credit with the resources you already have.
It’s worth noting that some creditors also increase your credit limit on their own without asking. In this case, the consumer can contact them to have the credit limit lowered if they choose.
4. Continuously monitor
It’s important to review your credit reports occasionally. Each year, you can request a copy of your credit report from each of the three major credit bureaus for free at annualcreditreport.com.
Many people worry that their scores will be negatively impacted if they check their reports. This is not true. Only hard inquiries (such as the ones that financial institutions do when you apply for credit) will count against your score. We suggest you use annualcreditreport.com to check your report regularly. Just note that it will cost money to check your score more than once every 12 months – and be careful not to sign up for a monitoring service if you don’t want it.
If you discover an inaccuracy in your credit report, you’ll want to be sure to flag the report to be investigated and removed by the bureau. To do this, you’ll need to contact the credit bureau as well as the business that reported the inaccurate information. Most of these institutions accept report disputes online or over the phone. They will investigate and keep you informed of what they find. Sometimes, this is how an account takeover is discovered and leads to you needing to close out the account. Read more about fraud, scams, and account takeovers in our Security Center.
5. Know your loan types
Lastly, you should be aware that there are different types of loans, and you can use them to pay back outstanding credit card debt reliably. So why should you borrow to repay borrowed money? Great question.
Your credit card is a form of revolving credit. Revolving credit allows you to borrow money as you need it and pay it back at your own pace (while still making at least minimum monthly payments). As you pay it back, the unused portion of your credit line is available again for you to borrow against. While this type of credit is convenient and flexible, you’re also obligated to pay back the borrowed money, plus interest. Because minimum payments for revolving loans are calculated every month based on the outstanding balance, these types of loans can take longer to pay off than other types of credit.
On the other hand, there are installment loans such as automobile, mortgage, and personal loans. Installment loans provide borrowers with a fixed sum of money upfront and require them to pay it back in fixed scheduled payment amounts until the loan is paid in full.
Revolving credit interest rates are typically higher than installment loans due to the flexibility they offer, which lenders typically consider more of a risk. Because of this, consolidating your credit card debt to a lower-rate, fixed-term installment loan may save you a considerable amount of money and help you pay your loans back faster.
Managing credit on your own can be tricky, but First Tech can help. If you have questions about credit, schedule a virtual or in-person appointment to speak with one of our financial professionals.