MoneyMagpie

Aug 12

How to improve your credit score

Reading Time: 3 mins

 A better credit score means more credit options and these tips will help you to improve yours.

 

Clean Up Your Credit Report

Before you do anything else, you need to request a copy of your credit report from each of the nationwide credit reporting companies.  These companies are Equifax, TransUnion, and Experian.  Legally, you are allowed to get one free report each year.  When you request this, you should be ready to save it to your computer or print it.

Once you have the report, you need to carefully examine it.  You should look for any accounts showing unpaid bills and late payments.  If any of this information is incorrect, the report will tell you where you can send your dispute.

A clean credit report will not only help your credit score.  It will also affect any job prospects.  There are many employers who pull credit reports before they make any final hiring decisions.

 

Pay Down Balances

The company that calculates one of the most widely used credit scores is FICO and they state that 30% of your FICO score is based on what you owe. However, the amount you owe is not all that is important. It is also how much you owe compared to the amount of credit that you have and this will make up your credit utilization.

If you have a credit limit of $1,000 and have a $500 balance, your credit utilization is 50%.  When you have maxed out your credit limit, your utilization will be 100%.

The problem is that there is no clear best utilization level. Experian suggests that you should keep this to 30% which means that you are only using $3,000 of your $10,000 limit. If you use this percentage, you should never exceed the $3,000 mark.

If you owe more than this on your credit accounts, you need to pay down your balances.  This is one of the quickest ways to improve your credit score.  You may need to live lean for a few months or pick up a second gig job to find the cash to pay off the balances. However, this will be beneficial and you need to look at doing this.

 

Pay Twice A Month

A lot of people assume they are going great when they pay off their credit card each month even when it has been maxed.  The problem is that your credit card will report the balance to the credit bureau once a month.  If you have a large balance each month, it can appear that you are overusing your credit.

If you have a credit card with a limit of $1,000 which is a reward card, you will use it for everything.  Each month, you will hit your limit on this card and when the statement comes you owe $1,000 which you pay off in full. The problem is that the credit card company is generally going to report the statement balance to the bureau.  This results in a picture of you having a $1,000 limit which you are using fully resulting in a 100% credit utilization rate.

You can reduce this problem by breaking up your credit card payments. You can charge everything to the card and get the rewards for doing this.  However, instead of paying the statement once a month, pay it off twice a month to keep the running balance low.  If you have to make a large payment on the card, you should have some cash on hand to pay it off immediately.

 

Increase Your Credit Limit

There are times when you are not in a position to pay down your balances. In these situations, you can take a slightly different approach to improve your usage utilization rate. This approach will be to contact the creditor and ask for a higher limit.

If you have maxed out your $1,000 credit card, you could ask to have the limit increased to $2,000. Dong this will instantly cut your utilization rate in half to 50%. The key to this method is to not spend any more on the card because it defeats the point if you increase your limit and then max the card out.

 

Open A New Account

If your credit card provider is not open to increasing your limit, you should apply for a new card from an online credit provider. This will help your utilization rate because this rate is based on all of the credit lines and balances you have. If you have credit of $10,000 and owe $5,000, you will have a 50% rate whether this credit is from one card or multiple cards.

Of course, it is important to note that opening multiple accounts at once is not good for your credit score.  Too many new accounts will make it appear that you want to go on a spending spree. Only apply for one or two new cards when you use this strategy.

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