In this article, we will look at how to improve your credit score and, therefore, your access to credit. Many people fail even to notice their credit score, how this impacts their personal finances and how they can improve it. However, before we look at improving your credit score, what is your credit score?
Credit reports and credit scores
Some people believe that credit reports and credit scores are the same; they are not. A credit report tracks your finances over the years, applications, payments, defaults, etc. Companies use this information to calculate your credit score. There are three central credit reference agencies:-
Each of these credit reference agencies will use the information in your credit report to calculate their credit score. While they may calculate your credit score differently, all scores will reflect the quality of your financial management. So, when we are looking to improve your credit score, firstly, we need to improve your credit report.
We will now look at ten ways in which you can improve your credit score.
Honour your debt repayments
Whether we are talking credit card payments, personal loan payments, car payments, or anything else, make your payments on time! Unfortunately, many people automatically assume that if their payment is “just a few days later”, this will make no difference. In reality, it is unlikely to prompt a collapse in your credit score, but it will be a negative factor if you continue. However, once you start defaulting on your debt repayments, this is a whole different scenario.
Many people automatically assume that financial companies will report them if they miss one payment. Wrong. Usually, you will receive a warning, and after three missed payments, the information will be added to your credit report. Typically, missed payments and other financial issues will remain on your credit report for seven years. So, a period of lapsed financial management could have an impact on your credit score for some time to come!
The best way to think of a credit report is a reflection of your financial management skills. That is your credit report in a nutshell. Don’t miss your payments.
Monitor your credit report
As we touched on above, very few people monitor their credit report/credit scores. However, there is no excuse with the Internet and the number of mobile phone apps available today. While monitoring credit scores tends to be free, you can gain access to your actual credit report for a relatively modest fee. So, why would you need to monitor your credit report?
Believe it or not, mistakes do happen regarding credit reports and notes of financial delinquencies. However, unless you monitor your credit report, it is unlikely you would become aware of errors. It is straightforward to fix these errors, inform the relevant party, explain the problem, and they will do their utmost to fix it as soon as possible. This is an easy way to improve your credit score but one which far too many people overlook.
Monitor your credit utilization rate
Your credit utilization rate is the percentage of credit used against credit available. For example, if you have a limit of $10,000 on your credit card, and have a balance of $2000, that would be a 20% credit utilization rate. It is important to remember that the credit utilization rate will be calculated at the end of each month, after paying your regular installments.
So, if you can pay off your credit card spending at the end of each month, this would not harm your credit score. If you are not in a position to pay off your monthly spending at the end of each month, you will see your credit utilization rate begin to rise. Suppose you were to ask for an increase in your credit; this may be rejected if you were heading out of control. The credit application may even be noted as an inquiry on your credit report. Keep your credit utilization rate under control!
Request a credit limit increase
If you are in a position to cover an increase in your credit limit, it may be worth requesting one (you don’t need to use it). Assuming your finances are in order, it is likely that your credit card company will approve your application. This is excellent news.
An increase in your credit limit will appear on your credit report as a positive factor. This is because it demonstrates to other financial companies that you are “good for the money”. Of course, situations can change relatively quickly, but on the whole, other financial companies would see this as a positive factor. It is important to note that everything is relative regarding finance, affordability, and debt repayments. So bizarrely, requesting an increase in your credit limit will help to improve your credit score.
For those with a relatively high credit utilization rate, an increase in your credit limit will reduce this.
Avoid joint debts where there is a chequered history
Whether we are looking at loan repayments, credit cards, utility bills, mortgages, or any other type of debt, avoid joint obligations where the other person has a chequered financial history. Unfortunately, they may appear as a connected party on your credit report and could negatively impact your credit rating. It is also important to note that with joint loans, legally, the financial companies see each party as being responsible for the entire outstanding amount. Did that surprise you?
If the other party were to default on their “share” of the debt, you would be left to pay the total amount. This type of unexpected liability could ruin a previously immaculate financial history. So be very careful when it comes to joint bills/debts.
Keep your old accounts open
As we touched on above, the basic premise of the credit report is a means of monitoring your financial management over the years. Consequently, the longer your credit history (assuming it is positive), the better your credit score. Why? This is a reflection of good solid long-term management of your finances.
If you have old credit cards or old bank accounts, for example, do not be in a hurry to close them. Ensure that you are up-to-date with payments, but these could be the key to a long-term positive credit report. Put yourself in the shoes of a lender. If you see somebody with a credit history going back 20 years, with no issues, what does this say to you? It can also be helpful to use these old accounts once in a while to improve your credit history/score.
Pay off the highest balances first
At some point, many people will find themselves with financial issues and perhaps unable to fulfill their financial liabilities in the short term. The key is to remain calm, focused, and appreciate this may take a long-term approach to resolve. When in a position, some people prefer to focus on their smaller outstanding balances in the first instance. Is this the right thing to do?
While it is obvious that higher outstanding balances will attract greater interest charges, they will also impact your credit utilization rate. Consequently, it is probably better to pay off the highest outstanding balances first so that you can slowly but surely begin to improve your financial file. Those that leave their higher balances until the end are often shocked by how interest and additional charges add up. These extra payments are above and beyond your regular monthly financial liabilities.
Piggyback someone with a good credit rating
In many areas of life, associating yourself with “good people” can impact your career and, in this instance, potentially your financial status. While not a game-changer, when looking to improve your credit score, there are some fragile margins. So, if you were to become an authorised user on a credit card taken out by someone with a healthy credit score, you could benefit.
This assumes that all payments are up-to-date, paid on time, and with a relatively low credit utilization ratio. Whether this would be the right option for someone with a healthy credit score is a whole different discussion. But, yes, piggybacking someone with a good credit rating can help you.
Avoid multiple finance applications
There are two different types of credit enquiries, soft enquiries and hard enquiries. Soft enquiries tend to happen when the individual is looking to “dip their toe in the water” but not commit. Hard enquiries occur when people go ahead with finance applications. Soft enquiries tend not to have an impact on your credit score, but a flurry of hard enquiries could act as a warning shot.
Again, if you put yourself in the shoes of a lender, checking the credit report of somebody with multiple short term hard enquiries does not give the best impression. So, when looking to arrange finance, yes, speak to companies with attractive offers, but try to limit your actual applications. Many people go “application crazy” due to the Internet and the ease with which you can fill out application forms. Unfortunately, even with a relatively short-term impact, this type of action could see loan applications blocked.
While there are ways and means by which you can “influence” your credit report and your credit score, nothing beats good old-fashioned budgeting. If you haven’t got the money, don’t spend it. You’re struggling to make ends meet, tighten your belt and reduce your monthly expenditure. For many people, this will be a case of short-term pain, long-term gain. However, those who keep spending, living off their credit cards and loan accounts, will eventually pay the price.
There are numerous ways to improve your credit score, although many people seem happy to carry on spending in ignorance. You must be aware of your credit report, ongoing entries, and your credit score. Those who perhaps have long-term ambitions to own their own home may suffer from this lack of action when applying for mortgage funding. Indeed, there is an argument to suggest you should pay great attention to your credit report/credit score in the couple of years before making a mortgage application. Give yourself the best chance!
Even if you experience financial difficulties, try to stay calm and focused. Speak to your creditors, explain the situation and, where possible, you may be able to put in place a short-term adjusted repayment plan. Alternatively, it may be sensible to consolidate your debts under one manageable loan. Lenders prefer to be aware of short term financial difficulties, to try and find a solution, rather than taking expensive action further down the line. They appreciate a proactive approach rather than those who “bury their head in the sand”.
Author’s Bio: Lori Wade is a writer who is interested in a wide range of spheres from business to entrepreneurship and new technologies. If you are interested in the technology or banking industry, you can find her on Twitter or LinkedIn.