Improving Your Credit Score in 6 Easy Steps

Your credit score plays a major role in multiple aspects of your life. Whether you’re trying to buy a home or a car, or you need to apply for a credit card, your FICO credit score comes into play. Unfortunately, for millions of Americans, their credit scores are holding them back.

According to studies, 16% of Americans have a credit score between 300 and 579, which is considered “very poor.” Another 16% have no credit score at all, which, in many cases, can be worse than having a subprime credit score.

Speaking of subprime scores, 34.8% of Americans have subprime credit, which makes it impossible to get the best interest rates, which either leads to higher-than-normal monthly payments which are harder to make and can lower your credit score if you miss one, or consumers simply staying out of the market altogether.

Are you one of the millions of people with credit score issues that you’re trying to overcome? It can feel like a heavy weight that you can’t free yourself from. Fortunately, there are some steps you can take to turn things around and improve your credit score.

These six tips for improving your credit score can set you up for financial success and give you the buying power that you need.

Review Your Report

Before you can improve your credit score, it’s a good idea to sit down and take a hard look at your credit report. By law, you’re entitled to one free credit report each year from the three major credit bureaus, Equifax, Experian, and TransUnion.

Some 40% of people report finding at least one error on their credit reports, so this is one of the most proven methods of boosting your score.

No, you’re probably not going to find an error that improves your credit score by hundreds of points after reviewing the report, but when you’re trying to get a better credit score, every point matters.

Spend some time reviewing the report and look for late payments that you can prove that you made on time, while also looking for any accounts that aren’t yours. Those are rarer to find but can have the biggest impact.

Credit bureaus are required by law to investigate any disputes within 30 days, so gather any evidence you can find to prove that your credit report has errors and file your disputes. These disputes are free to file, so don’t be afraid to file multiples if you run across more than one error on your report. Every point matters, ad you want to do as much as possible to get your score up.

Make Payments On Time

The biggest detraction to a credit score is late payments. Even if you’re just a few days late on a payment, it can have a negative impact on your credit report. During your review of your credit report, you should be able to find some patterns.

If you’ve struggled with making payments on time in the past, there’s not much you can do to rectify that, but taking a new approach to your finances is a great place to start.

If you run across a payment that you’re late making, try to get it caught up as quickly as possible. Also, do everything possible to stop making late payments. Late payments are like a heavy rock tied around your credit report, as it will sink you faster than anything else.

Improving your credit report is often about changing habits and creating a new normal for yourself. While making a payment on time won’t immediately turn things around, showing a consistent pattern of on-time payments is one of the best ways to slowly start turning things around.

Bring Down Your Credit Card Balances

Your credit score is ultimately a measurement of how much available credit you have. Companies are more willing to extend credit to you when you don’t have a lot of outstanding debt with multiple companies.

For instance, let’s assume that you have a mortgage and a car payment, along with four credit cards with outstanding balances. Depending on your income, you may have a lot of money tied up in outstanding debt. One of the most effective ways to improve your score is to start paying down those outstanding debts.

Most companies expect people to have a mortgage, so making your regular payments there is fine. Also, paying off your car loan at a normal rate is fine. If you have multiple credit card balances, consider focusing on the smallest one first and try to get it wiped out.

When you have less outstanding debt, you’ll be in a better position to gain more buying power through a higher score.

Don’t Close Old Accounts

One of the biggest mistakes that people make when it comes to raising their credit score comes after they pay off those credit cards. Contrary to what you may have heard, having a credit card does not lower your credit score. A credit card with a $0 balance is actually a powerful tool for improving your credit score. With that in mind, when you get those credit cards paid off, don’t close them.

Having a long credit history with a lender shows potential lenders that you’re a reliable borrower. Closing out accounts terminates that relationship and cuts you off from the benefits it provides.

Limit Hard Inquiries on Your Credit

The term “hard inquiry” refers to what happens when a potential lender does a credit check on you. Since you’re trying to improve your credit score, you should probably hold off on trying to open up any new lines of credit, but the reasoning behind that is multilayered.

First, and perhaps most obviously, it’s hard to improve your credit score while you’re opening up new sources of credit. Additionally, if you’re trying to repair a bad credit score, you’re unlikely to get approved for new credit, making the hard inquiry relatively pointless.

However, hard inquiries also have the potential to damage your credit score, especially if you have too many performed in a short period.

Lenders look for indications that borrowers are trying to get credit from multiple sources, so scrambling for credit approvals can negatively impact your score. Until you have your score to a level where you’re comfortable with it, avoid applying for new credit.

Diversify Your Mix of Credit

All debt is not equal, and creditors actually like to see that you’re capable of managing different types of debt. Credit cards, mortgages, car loans, and other types of debt work differently, and when you prove that you’re capable of successfully managing and repaying these different types of debt, it can improve your credit score.

It’s important to find the right balance in diversifying your credit mix, though. As we just discussed, opening up too many sources of credit too quickly can negatively impact your score. Be strategic about opening up new credit cards and going into debt while also looking for ways to add different types of debt to the mix.

Patience is Key

Depending on how low your credit score is, you’re probably not going to turn it around over night. It’s crucial that you remain patient with the process.

Making some small changes and then incorporate more changes along the way is vital. Remember, your journey to better credit is a marathon, not a sprint.

Be committed to the process and monitor your progress along the way.