Your credit score is one of the most important tools in your personal finance arsenal. Credit scores are often used to determine not only your eligibility for financing but also the interest rate that you will be charged on said financing. A decent increase in your credit score has the potential to save you hundreds if not thousands of dollars in interest payments over your lifetime.
Ironically, this powerful tool is often misunderstood by the consumer. This mostly stems from the fact that the formulas used to calculate your credit score are not completely disclosed by the credit bureaus. Fortunately, you can take matters into your own hands. After the break, I’ll show you 5 simple things that will get your credit score moving in the right direction.
#1 Get a Copy of your Credit Report
It is difficult to determine how to improve your credit if you don’t know where you stand today. You can easily obtain a copy of your credit report from any of the major credit bureaus. Be sure to request a report that includes your credit history as well as your credit score. Once you receive your report review all of your accounts for any collections, liens, or accounts that do not belong to you. Collections and liens should be paid as soon as possible. This will not remove these items from your report; however, it will reflect positively that you have paid these accounts in full. As for any accounts that do not belong to you, you should file a claim with the credit bureaus as soon as possible to have these items removed. This alone can have a dramatic effect on your score if the accounts are derogatory.
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#2 Get Current
If you are behind on any payments, bring those accounts into a current status as soon as possible. Paying your bills on time is the foundation of good credit history and score. All attempts at improving your credit will be wasted until your payment history is current.
#3 Pay Down Credit Cards and Other Revolving Debt
Once you are current on your liabilities, it will be time to shift your focus to credit cards and revolving debt. This particular type of debt impacts your credit greatly. Ideally, the amount of credit card debt you have on the books should never be above 25% of the total of all of your credit card limits. This is sometimes referred to as your revolving utilization, and it is nearly as important as your payment history in your overall credit picture.
#4 Keep Your Paid-off Credit Card Accounts Open
Your revolving utilization is calculated as follows:
Total Credit Card Balances ÷ Total Credit Card Limits = Utilization
By leaving your zero-balance accounts open, you are easily reducing your utilization.
#5 Do Not Open New Accounts Until Needed
The length of time your accounts have been open plays a significant role in your credit score. Accounts in good standing that have been open for a long time demonstrate your credit worthiness and responsibility. New accounts reduce the average time that your accounts have been open. Thus, you should open new accounts wisely, and only when you truly need them.
While the steps above will not boost your credit score over night, they will get you moving in the right direction. With a little time and diligence, your credit score will be on the rise ♦
