The quickest way to improve your credit score may be simpler than you would think.
A good credit score can give you a lot of freedom. A bad credit score can be prohibitive in more ways than one, making it harder to get loans with reasonable interest rates, or even to get a loan to begin with.
So, what is a good credit score?
According to Value Penguin, a credit score of 720 or more is considered excellent. 660 to 719 is good. 620 to 659 is poor. Anything under 620 is bad. In 2015, the average FICO credit score in America reached an all-time high of 695.
There are several different scoring models out there. The average FICO score will vary based on age and location. Most will fall between 660 and 720.
Why is Your Credit Score So Important?
There are many reasons why your credit score is important.
Many landlords will check your credit report before renting to you. They want to make sure you can and will pay your bills on time. So a poor credit score could influence your ability to find a place to live.
Your credit score also affects how much you pay in home and auto insurance. It even affects whether or not you are approved for a cell phone plan.
Most importantly, your credit score determines the cost of your future purchases. A good credit score gets lower rates on loans and credit cards, resulting in lower overall costs.
To put this into perspective, someone who has a credit score of 650 and gets a 30-year $400,000 mortgage loan is likely to pay over $70,000 more in interest than someone who gets the same loan, but has a credit score of 750.
As you can see, you can save A LOT of money by maintaining a good credit score.
Top 8 Ways: How to Improve Your Credit Score
1. Pay your bills on time.
This may seem like a no-brainer. 35% of your credit score is determined by your ability to pay your bills on time. Even a payment that is a few days late can significantly impact your credit score.
If you have missed one or more payments, that’s OK. By consistently paying your bills on time after your late or missed payments, your score should start to improve. But it may take a few months before you see results.
2. Raise your credit limit.
By raising your credit limit you are decreasing your credit utilization rate. That is, as long as you don’t adjust your spending habits accordingly.
Then you would just end up at the same credit utilization rate and owing more.
To put this into perspective, if you have maxed out a $2,000 credit card, and you call the creditor and get approved for a credit limit increase to $4,000, you instantly cut your credit utilization rate in half.
You should see results in an improved FICO score within a month or two with this method.
3. Use different types of credit.
Using different types of credit like personal loans from credit unions and installment loans for things like furniture, in addition to maintaining a credit card or two, shows your ability to pay your bills and manage the different types of credit.
Once you successfully pay these loans off, making all the payments on time, the credit reporting agencies will see you as a good borrower and your score will increase.
4. Dispute discrepancies and errors.
You should examine everything in your credit report, particularly focusing on accounts that show late payments or unpaid bills. If you find any information to be inaccurate, you can report the inaccuracies online through Experian, TransUnion, and Equifax.
The reporting agency will open an investigation if they find your claims to be substantiated, and things should be resolved in one or two months.
You are entitled by law to one free credit report each year. You can request your free annual credit report from the major reporting agencies at AnnualCreditReport.com.
5. Strategically open credit accounts.
Opening too many accounts in a short amount of time can have a negative impact on your credit score.
When you apply for credit, a hard inquiry is made on your credit report, which will dock your credit score a few points. So, the more times you apply for credit the more points that will be docked from your credit score.
If you have one or two accounts with low credit limits and haven’t opened any new accounts within the last six months, opening a new credit card account can improve your score.
This works because by opening a new credit account you are increasing your overall credit limit, which if you don’t increase your spending habits, decreases your credit utilization rate. You could also achieve this by contacting your current credit providers and requesting a credit increase.
It cannot be stressed enough to spend only what you can afford to pay every month.
6. Pay your bills twice a month.
Most creditors only report balances to credit bureaus once a month. Even if you pay your card off each month, if you are running up large balances, it could appear like your overusing your credit.
For example, if you use a rewards card to pay for everything and max it out or close too every month. Even though you pay your bill in full, when the credit reporting agency sends in their monthly report it will look like your utilizing most of your credit, which will decrease your score.
You can counter this glitch in the system by splitting up your credit card payments, and paying on your balances at least twice per month to keep your running balance down. If you make a large purchase and have the cash, you should pay it off immediately.
7. Become an authorized user.
In order to become an authorized user, you need to have someone who manages their money very well and is willing to add you on to their credit account and issue a card in your name.
Obviously this person will need to care about you and trust you a whole lot to add you to their credit account. You should have no intention of using this credit card and should be asking this favor of someone only to build or improve your credit score.
Once you are an authorized user, the account will show up on your credit report as well as the credit utilization rate and all the on-time payments associated with the account. As a result your credit score will increase.
8. Reduce the amount you owe.
Ultimately the best thing you can do to increase your credit score is to reduce the amount you owe.
The amount you owe determines 30% of your credit score, but with financial discipline it can be easier to reduce the amount you owe than clean up a late and missed payment history.
By paying on time, twice per month, and decreasing the amount you owe, you can control the factors that collectively make up 65% of your score.
So by diligently focusing and committing to reducing the amount you owe and paying bills on time, you will dramatically improve your score.
It is important to understand that the quickest you will see an increase in your credit score may be a few months.
You can easily ruin your credit score within a year’s period, and it will take even longer than that to repair the damages of irresponsible credit usage. It is a lot easier and less stressful to maintain a good credit score than it is to fix one.
The best advice is to not spend more than you can afford and to pay all of your bills on time. In the event that you lose employment and cannot pay, many creditors will work with you until you find new employment.
You have choices and the ability to improve your credit score, no matter how bad your score is. All you have to do is take action.
Do you have any tips on how to improve your credit score quickly? If so, please leave them in the comment section below.