Your credit score shapes loan rates, apartment approvals, and more — yet it is far easier to damage than to rebuild. Here are reliable ways to start raising it today.
1 Why Your Credit Score Matters
Your credit score can count for everything from obtaining reasonable interest rates on loans to whether you can rent an apartment. Even, according to a recent survey by Bankrate.com, whether someone is likely to want to date you. Unfortunately, not only is it lamentably easy to damage your credit score, it’s not so easy to raise it again, mainly because of the length of time credit blemishes remain on your record.
Billshark would like to recommend some ways to help you increase it.
2 Pay On Time and More Than the Minimum
Pay bills on time. This may seem elementary, but it’s the primary way lenders assess your credit worthiness. This doesn’t just mean such bills as mortgage or rent and credit cards, but items you wouldn’t think of, like utilities, and even child support. Late payments on any bill will stay on your credit report for as long as seven years. The rule of thumb lenders use is, “Past performance predicts future performance.” If you’ve always paid your bills on time, chances are you’ll continue to do so, their reasoning goes.
Pay more than the minimum payment. Even a few dollars more than the required minimum payment demonstrates that you aren’t cash strapped and counting every penny. Besides, most credit cards’ required minimum payments are barely enough to pay the interest on the balance and will end up costing you a fortune in the long run, so this is a good practice to follow regardless.
3 Manage Your Credit Card Balances
Keep credit card balances low. If you have a credit limit of $5,000 on your Visa card, and a balance of $4,500, you’ll make lenders nervous that you won’t be able to repay it and thus lower your score. Keep your balances at least 30% lower than your credit limit (known as your “credit utilization” ratio).
Lay off the credit cards. Credit bureaus calculate your credit score based on your statement’s closing balance at the end of the month, regardless of whether you pay it in full. Use cash or debit cards for purchases whenever possible.
4 Pay Down Debt the Smart Way
Here’s a tried-and-true method for accomplishing this: Pay off your smallest balances first (e.g., to such places as home improvement and department stores), then apply that monthly payment to larger balances, beginning with the highest interest-rate card. This systematic approach not only makes the credit rating agencies happy because you’re using less revolving credit, but also allows you a painless way to pay off your bills with money you’re already spending on them. Of course, afterwards don’t charge any more on the cards you’ve paid off.
In addition, you can earmark the savings Billshark has found for you on your monthly bills toward this goal. And be sure to put any windfalls (tax refunds, bonuses, unexpected inheritances, etc.) toward paying off debt. It may hurt at the moment, but when you see your balances dropping, you’ll find it’s worth it.
5 Keep Old Accounts Open
Once you’ve paid off credit cards or loans, keep those accounts open, just don’t use them. This gives you a high credit utilization ratio. And older accounts give you “age,” meaning a longer credit history. On the other hand, don’t open new accounts you don’t need just to increase your available credit. They’re not “aged” accounts and won’t help your credit score; they could even impact it negatively because you won’t have a history with them.
6 How the Credit Bureaus Are Changing
Finally, you may have heard recently that the three credit reporting bureaus (TransUnion, Experian, and Equifax) will soon begin computing credit scores differently. This change will not take place until this fall, and will actually have minimal impact on consumers.
The new computation will affect those who make a major purchase. If one person who buys an expensive vacation has a record of responsible debt repayment and another who makes the same purchase does not, the new model will take that into account when calculating their scores and not reduce the first person’s score as much.
The other change affects the credit utilization ratio. Again, if two people have a high credit utilization ratio, but one person has shown he’s paying down his debt while the other isn’t, the first person’s credit score will fare better under the new system.
Either way, don’t count on new rules to keep your credit clean. Use these reliable methods to boost your score.
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Frequently Asked Questions
How long do late payments stay on my credit report?
Late payments on any bill can stay on your credit report for as long as seven years. Because credit blemishes linger on your record for so long, it is far easier to damage your credit score than to raise it again. Paying every bill on time — including ones you might overlook like utilities and even child support — is the primary way lenders assess your credit worthiness.
What is a good credit utilization ratio?
Keep your balances at least 30% lower than your credit limit. If you have a $5,000 limit on your Visa card and carry a $4,500 balance, you make lenders nervous that you won't be able to repay it, which lowers your score. This ratio of balance to available credit is known as your credit utilization ratio, and keeping it low helps your score.
Should I pay more than the minimum payment?
Yes. Even a few dollars more than the required minimum payment shows lenders that you aren't cash strapped and counting every penny. Most credit cards' minimum payments are barely enough to cover the interest on the balance and will end up costing you a fortune over the long run, so paying more than the minimum is a good practice to follow regardless of its effect on your score.
Should I close old credit card accounts after paying them off?
No. Once you've paid off credit cards or loans, keep those accounts open but simply stop using them. Older accounts give you age, meaning a longer credit history, and help your credit utilization ratio. Avoid opening new accounts you don't need just to increase available credit, since they aren't aged and could even hurt your score because you have no history with them.
How are the credit bureaus changing how scores are calculated?
The three credit reporting bureaus — TransUnion, Experian, and Equifax — will begin computing scores differently, with minimal impact on most consumers. The new model rewards a record of responsible debt repayment on major purchases and treats a high credit utilization ratio more favorably when someone is actively paying down debt. Still, don't count on new rules — use reliable methods to keep your credit clean.
