While I am not a fan of relying on credit, there may be times that you are forced to use credit such as buying a house. When these occasions arise, it’s important to manage your credit properly so that you can receive the best rates possible. The interest rate that you receive depends upon your credit score. A good credit score can save you thousands of dollars in interest over the life of a loan. Before I get into the 4 best ways to boost your credit score, here are the 5 key factors that make up your credit score: 1) Past credit history, 2) Current amount of debt, 3) Length of credit history, 4) Types of credit available, and 5) Applications for new credit.
4 Great Ways To Boost Your Credit Score
1. Pay your bills on time.
The #1 way to improve your credit score is by paying your bills on time. Your individual loans are broken down into R and I ratings. “R” ratings are for revolving loans like credit cards. Revolving loans can be repaid and redrawn over and over again. “I” ratings are for installment loans like auto loans. Installment loans are to be repaid with a fixed number of equal payments and cannot be redrawn. If you want to attain that elusive R1 or I1 credit rating, always pay your individual bills within the 30 day time period. If your credit report has R1’s for all of your individual accounts, then it is highly likely that your credit score is 700 or above. As your rating drops so does your credit score. R2 means you repay in 2 months, R3 means you repay in 90 days and so on. The lowest score that you can get is an R9 or I9. An R9 rating means that this debt has been deemed noncollectable and the creditor has written off their chances of collecting any money. Once a debt falls into the R9 territory, it could take years to improve that individual rating.
2. Check your credit report regularly.
You should review your credit report at least twice a year to ensure that all of the information reported is accurate. Over 70% of credit reports contain erroneous information. You would be shocked by how many errors could exist on your credit report. If this is the case, make sure you know how to fix errors on your credit report for free. Credit agencies often erroneously list debts that are not yours on your credit report. Lenders often fail to submit updated account information that would benefit you. For example, if you used to pay your Visa bill late, Capital One may still have you listed as a late payer, even though you have paid your bill on time for the past 5 months. Report all errors to the appropriate credit reporting agency. You can find these forms on the credit reporting agency’s website. Contact lenders and ask them to submit updated account information.
3. Pay down outstanding debt.
Reducing your current level of indebtedness is one of the fastest ways to give a boost to your credit score. Your best bet is to have no debt and to keep your balance as close to $0 as possible. If you do have debt, aim to keep 70% of your credit line available. Let’s say you have a credit card with a $2,000 limit. The maximum amount of credit that you should use is $600. Lenders look favorably upon individuals that keep their outstanding balances low. Don’t forget to pay off all past due debts such as collection accounts. They won’t give a big boost to your credit score, but every bit counts!
4. Reduce your applications for new credit.
Loan shopping can hurt your credit score. If you want to improve your credit rating, you should limit applications for new credit. Credit checks and inquiries will lower your score. Be careful about the companies and agencies that you allow to run your credit. Department stores are known to offer discounts on purchases in exchange for customers applying for new credit. These credit inquiries can decrease your score by as much as 10%! The exception is that inquiries for new credit are treated as a single cluster as long as they take place within a 14 day period.
Do you have any other questions I haven’t addressed? Do you know of any other strategies that can be used to boost your credit score? If so, please tell us about them!
(photo credit: TrinityCreditServices)