Most people are aware of some of the basic ways to increase their credit score, such as always making payments on time and not going over their credit limits on their cards. However, many Americans are unaware of just how their credit scores get calculated, much less of all the different ways to keep those scores up.
Your credit score is a way for potential lenders to estimate your risk level as a borrower, but it can also give you a sense of where you are financially. High credit scores are one of the signs of financial stability, and they come with several perks.
Those with higher credit scores have an easier time getting approved for car loans, mortgages and financing in general. They also have a higher chance of getting lower interest rates on those loans compared to borrowers with lower scores.
Finally a higher credit score can also make it easier to have a renting application accepted by a potential landlord and help you enjoy many other advantages. Read on to learn how your credit score is calculated and what you can do to make sure you keep yours as high as possible.
What Determines Your Credit Score?
To understand how to raise your credit score or keep it from falling, you need to understand how your score is calculated. Even though different companies calculate your credit score with slightly different formulas, there are still general categories that determine your score:
- Payment History: Making payments on time is one of the most important factors when it comes to credit score. If you forget to make a payment, not only will you likely be charged a late fee, but your credit score may go down substantially.
- Credit Utilization: This refers to how much of your total credit limit you are actually using. The lower your credit utilization is, the higher your credit score should be. This is one of the biggest factors in your credit score.
- Credit History Length: The longer you have a credit line, the more trustworthy you look for new creditors. Credit bureaus also factor in the average age of all your credit lines.
- Credit Mix: Having a diverse credit portfolio can be a good way for the bureaus to check how you handle your finances. The type of credit line you have reflects how you handle your finances.
- New Credit Inquiries: If you have recently opened a lot of new credit lines recently, this might be a sign that you are not financially stable, which could make you a bigger lending risk. Because of this, it is important to limit “hard” credit inquiries, as they will make your score drop temporarily.
Tips for Boosting Your Credit
Now that you understand the basics of how your credit score is calculated, let’s take a look at what you can actually do to increase your score.
1. Get Your Credit Reports Every 4 Months
You are entitled to a free yearly credit report from one of the three credit bureaus: Equifax, Experian and Transunion. You can request your free credit report online relatively easily. Since you can only get one free credit check per year from each bureau, you can space them out for a whole year and get a credit report every four months.
The idea here is to routinely check all the credit information that bureaus have under your name. By not checking your credit report frequently, you might become a victim of fraud without you even knowing it.
If you notice any information that is incorrect, be sure to contact your credit bureaus and ask them to correct it, since incorrect or incomplete credit histories could impact your score.
2. Increase Your Credit Limit
Having a single credit card with a low limit is not enough for credit score companies to check if you can manage your finances well. Therefore, to build a higher credit score, you should have more than one credit card and have a relatively high overall credit limit.
Some financial experts suggest that you have at least three credit cards. One should be the primary credit card that you use often. It’s advisable that this credit card have the lowest interest rate and come with great credit card rewards.
Then, you should have another credit card you bring with you in case your first credit card gets declined.
Finally, you should keep one credit safe at home in case you lose your wallet and need to freeze or cancel the first two cards. Be sure to use this third card periodically as well to keep the credit card company from closing your account.
Important Note: Do not open a lot of credit cards on one go. Opening a lot of credit lines in a very short period of time can be a signifier that you are not handling your finances well. The rule of the thumb is to wait for six months before getting another credit card or opening another credit line.
3. Use Your Credit Cards Often
In general, there are certain purchases you should always make with a credit card. Not only do credit cards have better fraud protection than debit cards, but they also come with rewards like travel points, cashback and more.
When it comes to your credit score, though, there is a third reason to use your credit cards often: If you do not, then your credit card company may eventually close your account, which could lower your credit score. That is because having one of your credit accounts closed means that your overall credit limit goes down. Plus, your credit utilization rate will go up, since there is not as much unused credit to offset whatever balances you have.
Therefore, it is important that you use your credit cards often. Just be sure to use them on items that you could easily afford to pay for with cash. If you end up charging too much on your cards and cannot pay it off in time, you will be charged interest on your purchases and may eventually find it hard to figure out how to stop the cycle of debt.
Having a high credit score comes with a lot of perks, including a higher rate of loan approval and better terms on said loans. Just be sure to use your cards wisely, since many of the tips outlined above could easily backfire if you do not take the right precautions.