5 Tips to Improve Your Credit Score

Follow these 5 tips to raise your credit score so that you can buy a house, rent a place, and get an auto loan.

Sadly, we need an excellent credit score to rent an apartment, buy a house, get a car loan, and even sometimes to get an amazing job. Yes, it sucks to be reduced to a grade, but this is how the financial world works. If you don’t like it, work as hard as you can to have buckets of cash so you do not need to participate in the system. But for now, we need to figure out how we can raise our credit scores to give us the best financial opportunities.

 

What is included in My Credit Score?

Let’s go through the components of your FICO credit score by the least to the most important.

  1. Credit Mix (10%)

    Your credit mix can include:

    • Credit Card Debt

    • Student Loan Debt

    • Mortgage

    • Auto Loan

    The credit mix also takes into account the number of credit accounts.

    Lenders want to know that you can responsibly handle a mix of credit, but this does not affect your credit score too much.

  2. New Credit (10%)

    New credit includes:

    • Amount of new credit

    • How many accounts you’ve recently opened

    • Number of recent inquiries

    Lenders want you to get a new credit card or loan, but not too often in a short period of time. Basically, they want to potentially make more money from you from interest, but if they see that you are seeking credit too much, they might think that you are at risk to not paying back your loans at all.

  3. Length of Credit (15%)

    Length of credit includes:

    • How long your accounts have been opened

    • The age of your oldest credit account

    • The age of your newest credit account

    • The average age of all your credit accounts

    The longer your credit history, the better. Lenders want to know that you will be a dependable source of income for them over the years (haha…yea it’s not really funny).

  4. Amount Owed (30%)

    Amount owed includes:

    • The total balance owed on all your accounts

    • Utilization percentage =

      The total balance owed on all your accounts/ Total credit line

    Lenders care about this metric a lot because it shows how much of your available credit you’re using and how much you owe on specific accounts. Listen, lenders often give you a credit line that is so high compared to your income. If I used my whole credit line, that would be half of my annual income. There is no way I would be able to pay that back and lenders know that and will punish you for it.

  5. Payment History (35%)

    Payment history includes:

    • The number of accounts with missed payments over the last 7 years

    • Amounts owed on delinquent accounts

    • Collections and negative public record information

    Payments history is truly the most important to lenders. They want to see if you pay your bills on time. And this makes sense. If they don’t know if you will consistently pay back what you borrowed, it could ruin their business. So, even one missed payment can communicate to them that you are not trustworthy. If there is a financial crisis, they cannot count on you paying your bills and helping them to not go into bankruptcy.

Now that we understand the components of the FICO credit score, which is used by 90% of lenders, let’s go through the tips to help increase your score.

How to Raise Your Score

Let’s focus on the components that comprise 80% of your credit score — length of credit, amount owed and payment history — so that we can improve your score faster.

  1. START EARLY and don’t cancel credit cards

    Do not graduate college without getting a credit card. Honestly, do not graduate high school without getting a credit card. I’m not saying you should be a reckless spender at a young age, but get a credit card and charge like $5 on it so that you can start building your credit history. Your 30-year-old self will be thankful when you are applying for an auto loan and the auto lender sees that your length of credit is 10 years rather than 5, which boosts your credit score.

    You also want to maintain the length of your credit history. That means not canceling any of your credit cards. Do the same trick and spend $5 on that card, but don’t close it. When you close the account, your average age of all your accounts goes down, which could impact your credit score. Also, if you close the account, your credit limit will decrease, which will make your utilization appear higher, lowering your credit score.

  2. Keep your utilization below 5%

    Speaking of utilization, keep your utilization below 5%. This tip will insure that your amount owed is very low compared to your credit line at all times. Psychologically, you can trick your mind into thinking that you only have that amount available. If you think that you have $20,000 available to you (when you don’t), you are more likely to go shopping like you have $20,000. If you think that you only have $1,000 for emergencies, Christmas gifts, clothes, moisturizer, an oil change, and a weekend getaway, you will actually think about the cost of each item more seriously. And, you will stay within your budget.

  3. Always pay down your statement balance

    I’m a believer in using your credit card for your everyday budget, while still keeping your utilization below 5%. I use my credit card for my food and groceries budget, gas budget, and travel budget. With all of these, I get rewards points — cash back or travel points for the future. These rewards are effectively a “discount” on my everyday expenses. However, you need to pay down you statement balance every single month or you will not receive this “discount”. When you don’t pay down your statement balance every month, you will be charged interest. If that interest is greater than your “discount”, it’s not even worth using the credit card. Don’t let the lenders play you, play the lenders.

  4. Increase your credit line, but don’t use it

    We keep focusing on utilization because it’s so important. Another way to lower that utilization is increasing your credit limit. A lot of times the bank will offer to increase your credit limit or you can request to increase your limit. Do it! Just don’t actually spend any more than you were before. If you went from a $20,000 credit line to a $25,000 line, rejoice! You used to be at a 5% utilization when you used your credit card to pay your $1,000 everyday expenses, but now you’re at 4% utilization with your $1,000 everyday expenses. Do not increase your expenses. I repeat, do not increase your expenses. Remember, this is not your money.

  5. Put your payments on auto-pay

    Let’s tackle the most important component of your credit score: payment history. The only thing you have to do to be 100% in this component is to not miss a payment. So very simple, but it can trip us up. Don’t let it trip you up. Simply put your credit card payment on auto-pay. Hopefully, you make the statement balance your auto-pay because if you are truly following your budget you should not be overspending on your credit card during any given month (which I’m guilty of, especially during Christmas time). At least put your minimum payment for your auto-pay so that you can insure that you never miss a payment.

We’ve gone through all of these helpful hints, and you might be wondering…

Where can I get my Credit Score for free?

  • Your Credit Card — my credit cards from Discover and Chase both give me my credit score for free

  • Major Credit Reporting Agencies

    • Equifax

    • Experian

    • TransUnion

    You can request your credit report from all of these agencies one a year for free by going to AnnualCreditReport.com.

  • Credit Score Service Websites

    You will get your credit score for free, but will advertise products to you.

What steps are you going to take this month to increase your credit score? Comment below.

This post contains content this is for informational purposes only, and should not be considered legal or financial advice. Please read my Disclaimer for more information.

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