As one of the most important and accurate ways to measure financial health, a credit score predicts how likely you are to pay off a loan. Your credit score is determined by many factors, including current unpaid debt, the number and types of loan accounts you own, the age of your loan accounts, and more.
Because your credit score lets lenders know how reliable you are, you can rightly assume that the better your score, the more likely you are to receive a loan and receive it with lower interest rates. Here are some of the factors that contribute to credit scores:
- Higher credit scores are often indicative of on-time payments, low balances on credit cards, a mix of different credit card and loan accounts, older credit accounts, and very few inquiries for new credit.
- Low credit scores can be caused by late or missed payments, high credit card balances, collections, and judgments.
If you’re interested in making a significant purchase that requires a loan—whether it be a home, car, or personal loan—but you have poor credit, don’t be alarmed. In this blog post, we go through a step-by-step process on how to improve your credit score.
How to Improve Your Credit Score in 5 Steps
Although a bad credit score can cause stress, it’s important to know you are not alone. Around 30 percent of consumers have subprime credit, meaning their credit scores are between 580 and 669. Luckily, there are several simple things you can do to improve your credit with a bit of effort and time.
1. Review Your Credit Report
First things first: Get a clear picture of the terrain by understanding what is working in your favor and what is working against you.
You should pull a copy of your credit report from each of the three major credit bureaus. You can do this for free once a year, and it will let you see which factors are helping or hurting your score. If you aren’t already, begin investing in practices that contribute to higher credit scores, such as making on-time payments, having low balances on your credit cards, and using a mix of different credit card and loan accounts.
2. Handle Bill Payments
Your credit score is determined by five distinct factors: Credit usage, account age, credit mix, new credit inquiries, and payment history. Payment history accounts for 35 percent of your score, causing the biggest impact. That is why paid-off debts, such as old student loans, work in your favor.
To avoid late payments, here are some tips:
- Create a paper or digital filing system to keep track of monthly bills
- Set due-date alerts to know when a bill is coming up
- Set up auto-payments on your bills
You might also consider charging all of your bills to a credit card so that you pay your full balance each month. This route also simplifies bill payments.
3. Decrease Credit Utilization
Credit utilization is the percent of the available maximum credit on the card. This is the second most important factor in your credit score next to payment history.
The easiest way to keep your utilization favorable is by paying off your credit card each month. If you’re unable to pay your card off, keep utilization below 30 percent and try to trim it down each month to get below 10 percent.
If neither of these scenarios are possible, ask for a credit increase from your provider. Raising your credit limit will decrease your credit utilization. This can be done online or over the phone and requires information on annual household income.
4. Manage Old and Delinquent Accounts
Older credit age is more favorable to lenders because they can see the history of use, payments, mix of accounts, and more. Even if you no longer use certain credit accounts, keep them open to avoid lowering available credit and increasing utilization.
If you have delinquent accounts, charge-offs, or collection accounts, pay them off as soon as possible. Many organizations will work with you to formulate a payback plan, so contact a representative to discuss your options. Although this won’t erase late payments, it will improve payment history going forward.
5. Consider Consolidating Debt
A debt consolidation loan from a bank or credit union will pay off all of your loans, resulting in a single payment. If you can get a lower interest rate on the loan, you will be in a position to pay down the debt faster, which can improve your utilization rate, and ultimately your credit score.
Similarly, consider a balance transfer credit card, which allows you to consolidate multiple credit card balances onto one. Some of these cards offer a promotional period during which you will be charged zero percent on your balance.
Good Credit Leads to Great Loans
Now that you know how to improve your credit score, it is time to put these steps into action and work toward your ultimate goal of financing a home. Although it is possible to purchase a home with poor credit, the loans often require additional costs, such as mortgage insurance.
At radius financial group, we understand that the first-time home-buying process can be difficult to navigate, and we want to help any way we can. To get started, check out our guide, “Navigating the First-Time Home-Buying Process.”