It can be frustrating to know that your ability to accomplish just about anything in your financial life – like getting another charge card, opening a utility account, or securing a car loan – all rests on the size of your credit score. Whether you’re just starting out and establishing credit or working to repair a less-than-stellar record, here are four basic ways to improve your score.
Make Payments on Time
If you’re new to the credit world or most established with multiple accounts, the best way to positively impact your credit score is to make all of your payments on time. Even if you can only afford to send off the minimum amount required, making sure your payment arrives on or before the due date is important. By paying your bills as agreed, you’ll boost your credit rating and become a more desirable loan candidate by showing you reliably repay what you owe. To stay on track use calendar reminders, or try setting up automatic payments through your creditor or your bank so you don’t accidentally miss any due dates.
Keep Balances Low
While it may be tempting to splurge and max out your cards, it’s better for your credit score if you keep balances low. Potential creditors want to know that you are able to manage your credit and not let your debt seriously outpace your income. In general, lenders prefer borrowers who have a credit utilization ratio of less than 30%. That means that if all of your cards have a combined credit limit of $10,000, you’ll want to keep your combined balances under $3,000. It’s important to use, but not over-use, the credit that’s available to you.
Don’t Acquire Credit You Don’t Need
Once you’ve gotten your first card, you might think that you should sign up for every credit offer you receive. If nothing else, you might want to have as much money as possible at your fingertips in case an emergency arises. However, building a rainy-day fund is a much more sensible way to prepare for unexpected expenses.
When your wallet is full of credit cards, it can be all too tempting to overspend; for many, charging things doesn’t feel like spending “real” money, at least until the bills arrive. Even if you are disciplined and keep a cap on your card usage, having a large amount of credit available to you can be a red flag for lenders. You may be perceived as a risky applicant if by maxing out your credit you could be thousands of dollars in debt overnight. Keeping just a few accounts, and managing them wisely, can give you spending flexibility while helping you build a good credit score.
Don’t Cancel Credit You Don’t Use
On the flip side of having too many accounts, it can unfavorably skew your credit utilization ratio if you routinely carry balances but only have a few cards. Using the same low-balance scenario from above, if you cancel a couple of cards and reduce your overall credit limit to $6,000, then the same $3,000 in balances would now create a credit utilization ratio of 50%. This would make you appear to be a much riskier loan candidate than if you kept a lower ratio. Consider this when seeking the perfect balance between too many and too few cards.
While it won’t happen overnight, building or repairing your credit and achieving a stronger score isn’t impossible. By paying your bills on time and keeping your balances and your credit utilization ratio low, you should be able to establish a higher credit score and make your financial picture a lot more attractive to lenders.