3 Tips to Raise Your Credit Score
By K. Bridget Schneider, CFP®, CRPC®
Your credit score is an important factor in your financial life. After reading my July blog post, did you find yourself wondering how to raise your credit score? Regularly checking your report for errors is a great first step to maintaining your score. And as promised, here are some valuable tips to help raise your credit score.
Your payment history and credit utilization ratios are two primary factors in many credit score models. Together these may represent almost 70% of your credit score. Improving them will take some time. But the faster you address the issues that drag your score down, the sooner your credit score can increase.
#1 Tip to Raise Your Credit Score: Pay Your Bills by the Due Date
It is critical to pay all your bills on time. I’m not just talking about credit cards or loans. This also includes your rent, utilities, phone bill, and so on. It may help to use tools like automatic payments or calendar reminders to help you pay on time, every month. If you don’t have a history of credit card or loan payments but are making utility and cell phone payments on time, Experian offers a way to improve your credit score using Experian Boost.
If you are behind on any payment obligations, you need to catch-up as soon as possible. Late or missed payments will appear as negative information on your credit report for seven years, but the impact on your credit score declines over time. So, making on-time payments going forward helps to lessen the negative effect of the older late payments.
#2 Tip to Raise Your Credit Score: Manage Your Credit Cards
Credit utilization ratio plays a major role in credit score calculations. It is determined by adding all your credit card balances at any given time and dividing that amount by your total credit limit. For example, if you typically charge about $2,000 each month and your total credit limit across all your cards is $10,000, your utilization ratio is 20%. Most lenders like to see a ratio of 30% or less.
As tempting as it may be to close any unused credit card accounts, it may be a better strategy to keep them open. That’s because closing an account means you owe the same amount, but your total credit limit is lower. The result increases your credit utilization ratio and lowers your credit score.
However, be careful when applying for additional credit to manipulate your credit utilization ratio. Opening a new credit card can increase your overall credit limit, but the act of applying for credit creates a hard inquiry on your credit report. Too many hard inquiries can negatively impact your credit score. In addition, hard inquiries remain on your credit report for two years.
#3 Tip to Raise Your Credit Score: Be Cautious With Debt Settlement
Sometimes unexpected life events lead to more debt than you feel you can manage. Debt settlement is a practice that allows you to pay a lump sum, which is typically less than the amount you owe, to resolve, or “settle,” your debt. Settling accounts for less than the full amount you owe can harm your credit score. Any time you fail to repay a debt as you originally agreed, it can negatively affect your credit. That said, the negative impact of settlement is still less than the negative effect of not paying a debt at all or declaring bankruptcy. So please consider this option carefully when trying to reduce debt.
Negative information on your credit report will lower your credit score. And that information remains on your credit report for a set amount of time. But the good news is that information will eventually cycle off your credit report. Until it does, focus on the things you can positively influence to raise your credit score, which includes paying all your bills on time.
Considering how important credit scores are to your overall financial well-being, it’s smart to do all you can to ensure yours is as high as possible. Checking your credit report and credit score is a good first step. You may also find it helpful to speak with a Certified Financial Planner™ professional. Be sure to visit our website today or call us at 217-605-8130. Our mission is to help you make more informed decisions to better your financial position and reduce your financial stress.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax or legal advice.
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