A strong credit score can open up countless opportunities and help improve your financial stability. Good credit can help you get approved for rent leases, car loans, mortgages, credit cards, personal loans and more. Additionally, it also helps to secure a lower interest rate and better borrowing terms. For example, let's say you were looking to secure a $17,000 car loan over eight years.
A one percent difference in your interest rate (getting approved for two percent rather than three percent) would save you over $700 in interest over the length of the loan. This is precisely why so many people focus on improving their credit scores. If you don’t know how to improve — or even monitor — your credit score, it’s vital to start a plan today. Begin by following these 10 essential tips for improving and monitoring your credit score.
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1. Order Your Free Credit Reports and Analyze Them
The Fair Credit Reporting Act (FCRA) states that every consumer is entitled to a free copy of their credit report from each nationwide credit bureaus every 12 months. Your credit report summarizes all the information lenders have and have submitted to the credit bureaus. It’s important to order your credit report from all three main credit bureaus (Equifax, Experian and TransUnion), as they may be slightly different.
Having access to your report gives you insight into your credit score. You’ll naturally have a lower credit score if you have multiple negative items on your credit report. Your credit score gives lenders a guideline to how reliable you are with credit.
Make a note on your calendar to obtain your free credit report every 12 months and monitor your credit score’s progress.
2. File Disputes for Credit Report Errors
Once you’ve received your report, review it thoroughly to ensure there are no inaccuracies. According to Consumer Reports, 34% of Americans have at least one mistake on their credit report. These errors could needlessly drag your score down by dozens of points.
Some common mistakes on credit reports include:
- Duplicate outstanding debts
- Credit information from someone else with a similar name
- Paid debts listed as unpaid
If you find errors, file a dispute with the credit bureau. If the credit bureau personnel deem your dispute valid, they must legally look into your claim. The credit bureau typically has 30 days to contact the lender that provided the incorrect information and request documentation. If the lender cannot verify the details, the credit bureau removes the incorrect item from your report. This can bump up your credit score significantly.
It’s important to understand that you can file a dispute even for small errors. For example, spelling mistakes, incorrect dates or mistaken amounts are all dispute-worthy. That’s because you’re entitled to an accurate and fair credit report. If you file a dispute over a minor error, such as the wrong date on a debt, you can win the dispute, and there’s a chance the lender won’t refile with the correct information.
3. Automate All Your Payments
Wondering to yourself, “how is my credit score evaluated?” Understanding what impacts your credit score can help you make smart decisions that improve your credit.
One way to improve and maintain a good credit score is by automating as many of your payments as possible. Credit score evaluation is based on five factors, and payment history is the most significant factor — accounting for 35% of your credit score. A single late or missed payment can drag your score down. Creditors want to feel comfortable knowing that when they lend you money, they’ll get it back in time and in full.
Ensure you never make another late payment by setting up automatic payments. If any recurring bills don’t accept automatic payments, consider setting up a multi-step reminder system. Set a reminder on your phone and email a few days before the bill is due.
4. Pay Down Debts and Address Delinquent Accounts
It demonstrates that you’re a responsible borrower if you show creditors that you can pay off your debts. Prioritize paying down all debts as soon as possible.
Two popular pay-off methods:
- Debt Avalanche: The debt avalanche method has you list all your debts in order from highest to lowest interest. You pay all your minimum payments but prioritize paying off the highest-interest debt first. This costs you the least amount in interest over time.
- Debt Snowball: The debt snowball method lists all your debts from smallest to largest. Then make all of your minimum payments and focus on paying off the smallest debt first. Financial experts love this method because it can be more psychologically motivating. People can experience debt fatigue when tackling large debts, but the debt snowball method can be stimulating as you see those smaller debts get taken care of first.
While paying off your outstanding debts, make sure you don’t have any that are delinquent. Collection agencies are a headache, so pay off your debts and focus on improving your financial situation.
Paying off debt will:
- Improve your credit utilization ratio
- Reduce the number of bills you have
- Save you from paying enormous interest rates
5. Keep Your Credit Utilization Ratio Low
Amounts owed is the second most significant credit score factor, accounting for 30% of your score. Lenders want to see your credit being used responsibly. Using all the credit available to you every month implies you’re living beyond your means and can’t control yourself.
Experts recommend having a credit utilization of 30% or lower. Your credit utilization is all the credit available to you every month versus what you spend.
For example, let’s say you have three credit cards, one with an available limit of $10,000 and two cards with $3,000 limits. In other words, you have a total of $16,000 in credit available to you each month, but you shouldn’t spend more than $4,800. Even if you pay it back every month, utilizing more than 30% of your available credit can negatively impact your credit score.
Additionally, keep credit utilization in mind when you’re considering closing accounts. Let’s say you find that your $10,000 credit card doesn’t have great perks, so you decide to close it and use the other two cards. Previously, you were spending $4,000 across the three credit cards, so your credit utilization was at 25%, and you were in the clear. However, now you’re spending $4,000 on two cards with a total available limit of $6,000. This brings your credit utilization up to 67%, so your credit score will take a hit.
Instead, consider keeping your card open, but keep it at home and don’t use it.
6. Keep Your Oldest Card Open
The length of your credit history, which accounts for 15% of your score, is another one of the five factors that affect your credit score evaluation. Similar to the logic we mentioned in tip five, many people are tempted to close out their first credit cards. After all, your first credit card is often the one with the worst benefits, and you gradually find better cards.
However, if you close your oldest credit card, that credit history will disappear from your credit report. So, if you got your first card at age 18 and your second card at age 25, closing the first card can decrease your credit history by seven years.
If you don’t like using your oldest credit card, store it in the house and don’t use it often.
7. Diversify Your Credit Mix
Your credit mix is a factor that accounts for 10% of your credit score. Having a diverse credit portfolio is attractive to lenders.
Types of credit includes:
- Credit cards
- Personal loans
- Student loans
- Vehicle loans
While it’s good to have different types of credit, don’t open accounts only for this purpose. Over time, you’ll naturally get to a point when you have more diversified credit.
8. Limit Hard Inquiry Checks
When you apply for credit, there are two potential ways lenders will evaluate approval: a soft or hard credit check. A soft credit check has no impact on your credit score, so this can often happen without consequences. Unfortunately, the one that lenders tend to pull more is a hard inquiry into your credit. If you have multiple hard inquiries in a short period, it will pull down your credit score.
If you’re shopping for a new car, mortgage or loan, you can ask the lender to start with a soft inquiry into your credit. Based on a soft inquiry, they’ll be able to give you a rough answer concerning approval and at what rate. After that, you can pick your top lender and let them pull the single hard inquiry.
9. Boost Thin Credit
It’s estimated that 62 million Americans have a “thin” credit profile. A thin file means that there isn’t enough data in the credit report to generate a score. If someone has spent their life paying for many things in cash or debit cards, they may have a thin credit profile.
Unfortunately, thin credit is like a vicious cycle. Since the consumer has thin credit, lenders won’t feel comfortable approving their credit, so they can’t build credit data.
If you’re in this situation, there are solutions. Luckily, the credit bureaus have started to accept alternative credit data. You can sign up for data that typically wouldn’t be included on your credit reports, such as rent payments and utility bills, to be added to your profile. This alternative data can help lenders feel more comfortable giving you access to credit, so you can build up your credit report and generate a score.
Eventually, you can build your credit profile to a point where you see benefits. For example, a typical APR for credit cards with a good credit score is around 13%, while the average credit card APR is 17%. Clearly, good credit is worth working for.
10. Consider Using Credit Monitoring Services
Improving your credit might take some time, but your credit score can stay high once you build these patterns into your routines. Of course, you’ll need to monitor your credit so that if anything comes up (such as errors on your report or outstanding accounts), you can address it immediately.
Most people don’t have the time or interest to monitor their credit. Luckily, there are credit monitoring services available. These services can be a subscription model where you’re alerted if there’s a significant change on your credit file — such as a sudden drop in your credit score. Or, its professionals will examine your credit on your behalf for errors and opportunities for improvements.
Lendzi Can Help
If you’re a small business owner that has struggled to secure a business loan due to your credit score, Lendzi can help. Lendzi specializes in personal and professional needs and has helped entrepreneurs acquire more than $500 million in loans. Fill out an application with Lendzi so you can get your personal and business finances back on track.