The Top 3 Things You Can Do To Improve Your Credit Score
Your credit score is one of the most important numbers associated with your name throughout your life.
It is a number that sums up your perceived credit trustworthiness in the eyes of lenders in many different aspects of life. It begins building from the moment you sign up for your first credit card or cell phone plan, and it stays with you for the rest of your life. If you take care of it, it can open a multitude of doors when it comes to financial products. However, if you make a mistake, it can stay with you for years and dramatically impact your ability to secure loans or financing.
So what can you do to improve your credit score?
There are many different things you can do to help repair your credit score if you have suffered a dip. Here we will discuss the three best things you can do to boost your score. Read on to find out more!
Make Your Repayments On Time
The single biggest thing that will improve your credit score is to make any credit repayments you have on time.
Both the FICO and VantageScore credit scoring models place the most emphasis on credit repayment history. This refers to the payments you make towards all of your credit accounts and whether you make them in a timely manner or not. This includes accounts like mortgages, credit cards, cell phone bills, and utilities. Any account that counts as a credit account will contribute to your payment history.
Every credit account will have a due date for payment. Most accounts will allow some leniency when it comes to how late they will accept a payment without notifying the credit bureaus. However, once your payment is beyond a certain time, it will be counted as a late payment. This will count as a mark against your credit file in and of itself, but it is not the worst case scenario. If you then do not make the payment after an extended period of time, that credit file will be counted as having a missed payment. This will have a large negative impact on your credit score, and if you leave it unpaid indefinitely, it will be considered a defaulted credit account. This will have a drastic impact on your credit score and result in a large drop.
If you wish to improve your credit score, the single best thing you can do to improve it is to make your repayments on time. While one or two missed payments in your past can lower your score, several years of regular, on-time repayments can totally reverse the negative impacts and bring your score back up to a good place. Ensure all of your credit accounts are up to date and that you are paying the due balance on or before the due date. Set up automatic payments it if helps, or set a reminder in your phone. Just don’t let the payment be late!
Manage Your Credit Utilization Ratio
The second most important thing you can do is to properly manage your credit utilization ratio.
Your credit utilization ratio is determined by dividing the total amount you have spent by the total amount you have been approved for across all your revolving credit accounts. For example, if you had spent $1,000 and you had a credit limit of $2,000, your credit utilization ratio would be at 50%. Revolving credit accounts are essentially just credit cards, as they involve a “revolving” credit relationship that occurs on a monthly basis.
This number can apply to both individual lines of credit and your total credit portfolio. If you took the above scenario and said you also had another credit card whose limit was $5,000 but you had only spent $1,000 on it, your credit utilization ratio on that card would be 20%. If you combined those two credit account totals, you would have spent $2,000 out of a total approved credit amount of $7,000, making your overall credit utilization ratio around 29%.
Both the FICO and VantageScore credit models take into account your credit utilization ratio, however, they each place slightly different emphasis on either single line of credit or total credit utilization. It is generally advised to keep both your single account and overall credit utilization ratios below 30%. This is because most credit bureaus will treat anything above 30% as a warning sign and may give your credit score a slight dip.
The best way to do this is to treat each of your credit cards like a charge card. A charge card is one where you have to pay back the full balance of your credit card at the end of each month. By treating your credit cards like this, you will ensure your credit utilization ratio always stays below 30%.
A bonus tip is to try and pay off your statement balance as soon as you get your bill. This not only keeps it at the front of your mind so you won’t forget about it, but your credit provider will also generally report your balance to the credit bureaus around a week before the due date. That means even if you pay your balance in full on the due date, your credit provider will likely already have reported your outstanding balance to Equifax or TransUnion, which can result in a lowering of your credit score.
Even if you do end up getting a slight ding in your credit score due to high credit utilization ratio, you can rest easy knowing that this is one of the only non-long term impacts on your credit score. The effect your credit utilization ratio will have on your score resets every month, so if you suffered a loss the previous month but paid off your balance before the reporting date this month, your score should go back to what it was prior or even higher.
Have A Diverse Mix Of Credit
The last big tip we have for improving your credit score is to have a good mix of different credit accounts.
You might think that having less credit or owing less money to lenders would have a positive impact on your credit score. However, somewhat counterintuitively, the reverse can be true. If you only have the one credit card and it has a very low balance, or even if you have no credit cards, no personal loans, and have a prepaid cell phone account, your score will actually be a lot lower than someone who has several credit cards, a car loan, a mortgage, and a postpaid cell phone plan. This is because a credit score is based on your overall credit usage and trustworthiness in paying it back. If you have no credit accounts, the credit bureaus have no idea how well you handle credit, and thus your score will be low.
However, if you have too many “undesirable” credit accounts, this can also reflect poorly on your credit score. These might be multiple department store credit cards, payday loans, or multiple lines of credit with subpar lenders. Credit bureaus will most often see these credit accounts as a red flag for someone who cannot manage their credit effectively and could penalize them with a lower score.
Thus, it is definitely preferable to have a good mix of high-quality credit accounts in order to improve your credit score. A good mix consists of any mix of the below:
Having several credit cards with reputable banks or credit unions is essential in a good credit mix. However, be wary of applying for many credit cards in too short a span of time, as this can lower your score in the short term. Ensure you are only applying for credit cards you are fairly certain you will be approved for, as you do not want to take the credit hit for nothing. Also, make sure you are keeping all of your credit card accounts to sub 30% credit utilization to maximize your credit score.
A car loan is a great credit line to add to your portfolio. As the monthly repayments are (usually) the same, they just become a part of your financial routine. If you continue to make regular, on-time repayments, your credit history will improve dramatically and you should see solid gains in your credit score. Even a bad credit car loan can help improve your score if you stick to a good payment schedule, allowing you to get on the road whilst also building a good credit history.
A mortgage is one of the hardest forms of credit to secure and is the single longest credit relationship you are likely to have in your life. Credit bureaus like to see well-serviced mortgages on your credit file, as it shows you were creditworthy enough to be approved and that you are able to pay off a large credit amount with regular instalments.
Having utility accounts in your name and in good standing is another great element to add to your credit portfolio. Utility accounts include things like cell phone bills, hydro, water, and gas. As these are considered essential services, they are also some of the easiest credit accounts to secure. You might have to pay an account securing amount if you are a new customer, which you will get back once you move to a different provider. Keep these bills paid on time and in full and your credit score is set to soar.
If you have a good mix of the above credit accounts and they are all repaid regularly and on time, your credit score is bound to climb. If you really are not using a credit card account and it is charging you a yearly fee, you should close it. However, you should look at either increasing the limit on one of your other credit cards to compensate for the loss in total approved credit, or you should consider opening a new no-fee credit card. This will allow you to maintain your total overall approved credit which will directly impact your credit utilization ratio.
Ultimately, if you practice good credit hygiene your score has nowhere to go but up. Ensuring you keep all of your revolving credit accounts to sub 30% utilization, making regular on-time repayments, and keeping your credit mix diverse will ensure your score is in the excellent range in no time!