There is no denying that building your credit is a must. Learning ways to increase your credit score will help you to save money now and in the future. Credit is important when it comes to getting the car that you want, the home that you want, and even the job that you need.
There are simple ways to increase your credit score that you can try. Whether you have no credit, or you are trying to rebuild your credit taking the right steps can get you on the path to good credit.
Why You Should Find Ways to Increase Your Credit Score
Having a credit score that is deemed good is vital to managing your finances effectively. Most people know that a credit score counts when you are trying to get a mortgage or buy a new car, but a lot of people do not realize that a good credit score is not just about securing credit.
Today employers use your credit score to determine trustworthiness. Insurance companies use your credit score to offer you coverage. If you try to rent an apartment the property manager will often run your credit as well. Your credit score is used by a wide range of companies to make decisions about how much they will charge you for a service, whether they will hire you, and whether you can live in their property.
Finding ways to increase your credit score is not only about your financial health, but it is also is about your lifestyle. Building and rebuilding a good credit score is vital to living the lifestyle that you hope for.
How Does Credit Work?
Understanding how credit works is your first step in learning ways to increase your credit. A lot of people know that paying their bills on time is an important way to build their credit, but that is where their knowledge of how the credit system works.
We will start at the beginning to help you understand how credit is determined. Let’s say you are looking for a new car, but you do not have all the money to pay for that car. You will start by finding car dealers that finance their vehicles.
You will be required to put a down payment on the vehicle that you want. The finance company will provide you with the rest of the money to pay the dealership. Having good credit means that you will get lower auto loan rates because you are less of a risk to the financing company. In other words, you have proven yourself through on-time payments, and keeping your debt to income ratio low.
There are three major credit reporting agencies in the US. Each month creditors send information to these credit reporting agencies about consumers. The information that is sent to the credit reporting agencies include:
- High credit on the account
- On time payments, how much those payments are
- Late payments, and how late you are
Every 30 days your information is reported to the credit agencies. They use the information that they have collected about you to assign a numerical score that ranges from 300 to 900. The credit bureaus use a matrix to determine credit scores that include:
- The amount of credit that you use
- How prompt you are in with your payments
- Your “credit age”
There are sweet spots for every criterion that you should strive to meet to get your credit score up. For example, the sweet spot for how much credit you should use is about 30% of the credit available. If you have $3000 of credit available than you want to be sure that you stay under $1000 of use.
On time payments are a must. Additionally, if you can make more than the minimum amount of payment due, that is even better. Credit is a dual-edge sword, you want to use it, but you do not want to overuse it.
One of the ways to increase your credit that works well is to use your credit cards, but pay off the balance every month. This can really boost your score. Staying under 30% of usage is another one of the ways to increase your credit. If you cannot stay under the 30% usage, you can apply for more credit and NOT use it. This will increase the amount of credit available to you which will lower your percentage of credit usage. However, it can be a slippery slope when you apply for more credit because the temptation to use it is there.
How long you have effectively managed your credit is also figured into your credit score but does not carry as much weight as the other criteria.
What Can Damage Your Credit and How to Avoid It
Let’s say you lose your job or go through a divorce, or you have another life crisis and you get behind on your bills, it would stand to reason that your credit score is going to take a ding. Of course, you can do what you can to avoid losing traction with your credit score. For example, if you lose your job, connect immediately with an employment agency to find a new one, and in the meantime call your creditors as soon as possible and explain your situation.
It may sound hard to believe but most finance companies and credit card companies want to work with you. The reason that many people let their credit fall to the wayside is simply because they do not speak up and they do not seek help. There are ways to increase your credit even when you cannot make on-time payments, but you have to step up to the plate and be willing to explain your situation.
Many companies are open to debt negotiation where you are given the opportunity to pay less than you owe to settle an account. It can help to have a professional on your side to manage the negotiations. If your unemployment lasts beyond the period that you can afford to pay your bills, connecting with a company that can negotiate your debt on your behalf can help to rescue your credit score. It can work with everything from old orthodontic billing to your car payment. The important thing is that you try to work things out.
Remember that your credit score is a reflection of your responsible use of credit. That means if you find yourself in a bad spot that you reach out to the creditors to try to find a solution before it goes into a collection status.
Other events that can ding your credit and send your score in the wrong direction include:
- Too many inquiries
- Tax judgment or other public record notated on your report
- Charged off accounts
In some instances it is not so much the ways to increase your credit that you have to concern yourself with, it is more ways to keep your score from decreasing. If you have too many inquiries are your credit report you can lose some points.
In almost every case when you apply for credit a “hard pull” is done. A hard pull is when a creditor sends a request to the credit reporting agency. That request is notated on your credit report. Typically these inquiries will stay on your report for up to 3 years. While they do not have a tremendous effect, in some cases, every point counts, and losing even 2 can be an issue.
How can you avoid hard pull inquiries? Simple, ask yourself if the hard pull is worth it. Do you really need this credit? For example, personal insurance companies may or may not pull your credit, but it is a necessity to have personal insurance, so it is worth the hard pull ding. On the other side of the coin, if you are looking for ways to increase your credit, you may want to forgo having that department store card and the hard pull on your credit report.
Another big dent to your credit report can come from public records. For example, you owe the IRS some money, and now they are coming after you and it reflects on your credit report. Avoiding this issue is the best way to head off the potential problem. Meet with accounting and tax planners before you have a problem with the IRS and you can avoid the problem altogether.
Start with Savings
Another one of the ways to increase your credit is to pay it all down as soon as possible. Let’s say you have $3000 saved, but you also have $2100 in debt. Your savings can work harder for you if you use it to pay down your debt.
Interest rates on savings is typically pretty low in a traditional passbook savings account. Yet, interest rates on credit card debt can be very high. Gaining the low interest on your savings while paying out the very high interest on your debt is counterintuitive.
Put your savings to work and start paying down your debt. Larger than minimum payments is one of the easiest ways to increase your credit score. Other ways to increase your credit by making smart money moves include repairing things that you have instead of replacing them.
Instead of financing that new refrigerator, contact an appliance service company and pay out of pocket to have it repaired. Then start saving for a new refrigerator if your heart is set on one. Credit is great to have but it does not mean you need to stretch it as far as you can.
Another example of when savings can be used instead of taking credit is for those home upgrades that you want but do not necessarily need. Home remodeling contractors will often offer financing packages, which is a great opportunity if the repairs are necessary, but if your home upgrade is more of a want than a need, try to pay outright for it.
Credit is not free. In some cases, you wind up paying more in interest than you do in principal. Adjusting your lifestyle can help you to keep more of your money to pay down the debt that you already have.
Learn to be a savvy consumer. When you are shopping for services or products do your due diligence and shop around for the best value to ensure that you are not overpaying and just relying on credit to get what you need. Whether you are looking for distance movers to take you to your next chapter or you are looking for a veterinarian for your pet, the rules are the same, compare costs, and services before you make the decision to buy.
When you shop smart, you can take the savings and apply it to your debt, which is an easy way to increase your credit score. Of course, there are more ways to increase your credit score, but being a savvy shopper should be part of your commitment to improving your finances.
Disputes and More
Credit reporting agencies are not infallible. You should review your credit reports once a month to ensure that the right information is being recorded. There are both paid services, and free services that you can use to monitor your credit reports.
Should you find that there is information that is faulty on your credit report each reporting agency has a process in place so that you can dispute the information. It is strongly recommended that you act quickly if you recognize:
- Incorrect account information
- An account that is not your account
- Any other information that does not belong to you
While the credit reporting agencies are usually good about reporting accurate information, there are times when they do make mistakes that can affect your credit score. It is important that you follow the process that is in place to dispute any misinformation.
One of the easiest ways to increase your credit score is to ensure that your credit reporting is accurate. It takes only a few minutes each month to review your information. When you dispute something, the credit reporting agency cannot use the disputed information to assign a score, which can up your points a little.
When it comes to ways to increase your credit score, slow and steady is the rule. People often ask about how they can increase their credit score by hundreds of points in a week or two, the fact is, there is no way to do that. Plan on spending at least 6 months using ways to increase your credit score to get to that coveted “good score”.