We recently published an article here on KCL entitled “10 Simple Ways to Destroy Your Credit”, which discussed many of the ways your credit score could be sent into a plummeting tailspin. Fortunately, if you’re unhappy with your less than stellar credit score, that number doesn’t have to stick with you for the rest of your life. While it will take time and diligence, your credit score can increase. Here are 11 ways to do it—we’ll start with the basics and work up to some tips that may surprise you:
1. Know where you stand (check your credit score)
Checking your credit score when you know it’s not very good is like stepping on the scale when you know you’ve gained weight—it’s not fun and it’s likely to give you a slap-in-the-face reality check, but if you want to be able to quantify your progress in the future, it’s a necessary first step. Pursuant to the federal Fair Credit Reporting Act, consumers are entitled to one free credit report per year from the three main nationwide consumer credit reporting companies: Equifax, Experian and TransUnion.You can obtain this free credit report at AnnualCreditReport.com; however, know that this free credit report does not contain your actual credit score. If you want to check your actual credit score, you can sign up for the 10-day free trial at MyFico.com (just remember to cancel your subscription before the 10 days are up, otherwise your credit card will be charged the monthly subscription rate). Be wary of any company that offers a “free” credit score because more often than not this “free” credit score comes with strings attached, such as having to sign up for a monthly subscription or pay for other services.
2. Pay your bills on time every month
A whopping 35 percent of your credit score is based on your payment history on all the credit accounts you’ve held in the past 7 to 10 years, which can include, but is not limited to, bank credit cards, retail credit cards, mortgages, car loans and student loans. The longer you are late with payments on your accounts, the farther your credit score will plummet. Just one measly missed payment can cause your credit score to drop 20 points. If you’ve missed payments on your account, get current and stay current. Pay your bills, even if it is just the monthly minimum payment, on time every month from here on out, and your credit score will slowly increase over time. If you have trouble remembering to pay your bills on time every month, consider setting up automatic payments for your accounts. If you do set up automatic payments, make sure you have sufficient funds to cover the payment or you may incur bank overdraft fees or returned payment fines.
3. Pay your parking tickets, library charges and other municipal fines and fees
Think blowing off a $22 expired meter parking ticket or that $5.60 library overdue charge for that copy of “Personal Finance for Dummies” you forgot to return is no big deal? Think again! Facing massive budget issues, many cities have hired collection agencies to chase down these often-ignored small debts. If your bill, no matter how small the amount may be, is sent to collections, your credit score can drop by a staggering 100 points. If you pay the collection agency for your debt, your score will start to rise again.
4. Pay off credit card debt first
Like most people, you probably have not only credit card debt but also debt from your mortgage, student loans, or other debt sources. While paying off your mortgage or student loans will increase your credit score, paying off your credit card debt will have the biggest effect on your credit score. As such, if you want to reap the biggest “rewards,” pay off your credit card debt first.
5. Keep your credit utilization ratio under 25 percent
Your credit utilization ratio is the percentage of your credit limit that you’ve used. For example, if your credit card’s credit limit is $5000 with a total balance owed of $2500, your credit utilization ratio is 50 percent ($2500/$5000 = .50 = 50%). To increase your credit score, pay down your total balance so that your credit utilization ratio is, at the very highest, 25 percent. Continuing with the same example, that would mean that you would want to pay off at least $1250 of the $2500 you owe. By reducing your balance by $1250, your credit utilization ratio drops to 25 percent ($1250/$5000 = .25 = 25%) and your will credit score will rise. You can also decrease your credit utilization ratio by requesting a credit limit increase; however, you typically need good credit and a solid history of paying on time for a creditor to approve your request.
6. Keep your oldest credit card account active
Fifteen percent of your credit score is based on the length of your credit history. The longer your credit history, the higher your score. This means that you should typically hang on to your oldest credit card account and keep the account active. If you have to actually use the card to keep the account active (check the account policies), use that card to make very small purchases and then pay off those purchases in full every month. If you don’t want to keep an old account open because the card has a fee and you never use the card, call the credit card company and ask if they can convert your account to a no-fee card.
7. Credit card virgins: apply for a secured credit card
Even if you’ve paid your bills on time your whole life, if you’ve never had a credit card account or taken out a loan you have no credit history, and creditors will have no record of how you manage your debt. As such, your credit score is going to be on the low side. Opening a credit card and then responsibly managing your debt by paying your bill on time every month and keeping your credit utilization ratio under 25 percent will increase your credit score. But there’s a catch: the majority of credit card companies and lenders will not let you open a credit card account or take out a loan if you have no credit history. The solution: apply for a secured credit card. Secured credit cards require a security deposit, which can be anywhere from $250 to $5000, to establish your credit line. If you fail to pay your credit card balance, the creditor will take that money out of your security deposit. When using your credit card, keep your credit utilization ratio under 25 percent and pay your balance in full on time every single month as such responsible behavior will increase your credit score. Keep up this responsible behavior for a full year, and you will typically be eligible for an unsecured credit card, which will also help increase your credit score when used responsibly.
8. Add missing accounts
If you have any accounts or credit lines that are not reported on your credit report, you can raise your credit score by getting these missing accounts added to your credit report. For example, I’ve had a cell phone in my name and have been paying the bill monthly for eight years, but my cell phone account is not included in my credit report. The first step is to make a list of every company that you pay monthly but is not included in your credit report. This list of companies may include, but is not limited to, your telephone company, Internet provider, cable provider, utilities company and television provider. Next, contact each of these companies and ask them nicely if they will report your payment history to the credit agencies. While companies aren’t required to report your payment history to the credit agencies, many will do so upon request.
9. Make small payments throughout the month
Instead of making one large payment on the date your credit card bill is due, make several small payments throughout the month before the due date. Every time you make one of these small payments, your credit utilization ratio will drop, which will help bump up your credit score.
10. Pay bills on their report date, not their due date
Let’s say that you spend $2000 dollars on your credit card on September 1st and then pay the balance in full on its due date, September 25th. However, your credit card company reports your balance to the credit reporting agencies on the 15th of every month. This means that if someone checks your credit report between September 15th and September 24th, it will indicate that you have a balance of $2000 on your account even though the balance isn’t due for another 10 days. To prevent this from happening, call your credit card company and ask what the reporting date for your account is. If it’s earlier than your due date, make sure to pay your balance by the reporting date.
11. Mix it up (have a mixture of credit types)
Ten percent of your credit score is based on your “mix of credit.” The ideal consumer would have a mix of the following different types of credit in their credit profile: one or two installment loans (i.e. personal loans, student loans, car loans, etc.), one or two mortgages, and three to five credit cards. To increase your credit score, try to match this ideal mix of credit by taking out an installment loan or opening an additional credit card account and then making sure to pay these accounts on time every month.