Having a good credit score can save you both time and money. It’s easier to get loans with a good credit score. Easier to get credit cards with a good credit score. It’s also possible to get lower interest rates with a good credit score. If you’re credit score is bad then you need to learn how to improve your credit score fast.
Your credit score is made up of a few different parts. Later in the post we’ll review each piece and how to improve your credit score for each part. But the first thing to do is see what your credit score is right now.
Online Credit Report:
It’s important to know what your score is and to check it at least once per year. There are lots of credit reporting agencies that will give you access to your scores. Experian has a great deal right now for $1. If you sign up for their Credit Tracker service you get an introductory rate of just $1 (regular rate is $21.95/month).
For just a buck you get access to all their credit reporting tools for a whole week and you can cancel at any time.
What Is A Bad Credit Score?
Your credit score will fall into a range. These ranges are used to determine if you have excellent, good or bad credit. Once you use the Experian tool to find your credit score you can see if you have excellent, good or bad credit. Anything below 650 is generally a bad credit score.
- 300-550 – Bad Credit – Expect to get declined for credit cards or loans. Or expect to pay very high interest rates
- 551-650 – Poor Credit – Expect to qualify for some loans but only with moderate to high interest rates
- 651-720 – Average Credit – Likely will qualify for new credit cards or loans but don’t expect competitive interest rates
- 721-780 – Good Credit – Will qualify for new credit and at very good interest rates
- 781-850 – Excellent Credit – Will qualify for new credit and at the best interest rates available
What Makes Up Your Credit Score?
The nice thing about your credit score is that its very straightforward to understand. There are only five things that impact your credit score so finding out how to improve your credit score isn’t too difficult.
1. Payment History = 35% of Credit Score = Do you pay at least your monthly minimum on time?
2. Debt To Credit Ratio = 30% of Credit Score = How much credit do you have available and how much do you use? How many accounts are being used vs how many accounts have credit available?
3. Length Of Credit History = 15% of Credit Score = Age of oldest account, age of newest account and the average age of all credit accounts.
4. New Credit = 10% of Credit Score = Opening multiple new accounts in a short period of time is a high risk flag and gives a lower credit score
5. Credit Mix = 10% of Credit Score = Mix of accounts between credit cards, retail credit cards, mortgage loans, instalment loans etc.
How To Improve Your Credit Score:
#1 Clear up any mistakes
Your credit report can have mistakes. This is why its important to check your score every so often. By clearing up these mistakes you can have a quick improvement in your credit score.
Mistakes could be from incorrect late payments, paid loans that show as outstanding, old credit cards that have since been closed, balance amounts that are incorrect etc etc
Correcting these mistakes will have an instant result on your credit score.
#2 Make payments on time (even just the minimum)
Payment history is the largest portion of your credit score. Making payments on time is how to improve your credit score on a monthly basis. Even paying just the minimum amount will count.
Setting up reminders can help you make payments on time. There are also options to make the minimum payment automatically from your bank account.
If you’re having trouble making ends meet then ask your credit card company or utility for an extension on your payment date. Not all companies will do this but some will extend your payment date 15-30 days at no cost.
#3 Improve your debt to credit ratio
On part of your score is based on how much credit you have available vs how much debt you have outstanding. If you have $5,000 in debt outstanding and $5,000 in available credit then your debt to credit ratio is 100% ($5,000/$5,000).
But if you increase your credit limit to $10,000 then your debt remains the same at $5,000 but your available credit has increased to $10,000. This lowers your debt to credit ratio to 50% ($5,000/$10,000).
Experts say that you should aim to have a debt to credit ratio of no more than 30%.
Asking for more credit is one way to lower your ratio but this could impact the “new credit” portion of your credit score. Another way to improve your debt to credit ratio is to pay down some of your outstanding debt. You can also transfer any credit card debt into a personal loan.
#4 Pay down credit cards and other “revolving credit” first
If you have extra money to put against your debt then pay down your credit cards first. This will save you high interest rates and it will have the biggest impact on your credit score.
Installment loans and mortgage loans should be paid off last.
#5 Don’t close old credit cards (unless they’re costing you money)
Having very old credit cards that don’t have any annual fees will help your credit score. There is 15% of the score that looks at your oldest, newest and average credit age. Having an old credit card will help improve this part of the score so don’t cancel it.
The only exception is if the card has an annual fee. Obviously an annual fee of $60-$120 isn’t worth the short-term hit to your credit score.
#6 Just wait
Serious financial trouble will come off your credit score within in 7-10 years. It’s a long time to wait but thankfully it’s not an eternity. Negative things like bankruptcy, foreclosure, law suits, wage garnishment, liens and judgements are all serious red flags on your credit score.
After 7-10 years these flags will begin to fall off of your credit report and will significantly improve your scores.
In the mean time you can use special credit cards like a secured card to build your credit history. These cards are secured by a deposit and therefore are available to those with even the worst credit scores.
By using these cards in a responsible way you’ll be building a good credit history even while these red flags are on your report.
Photo by frankieleon via Flickr