Most of us are not exactly financiers. As recent studies have indicated, more than 70% of Americans do not have a working knowledge of their credit score. This probably means that many of you might not have any clue what a credit score is, how it works or what you can do to improve it. Frighteningly, if you are like the rest of us who have a lousy credit score, chances are that you are not alone.
These numbers on your credit reports tell lenders whether or not you are a bad risk. If you have bad credit, your credit score will be a pretty poor number. These days, your credit score matters a lot. If you want to qualify for a home loan, a credit card, or even a loan at all, your credit score will impact those decisions. On the other hand, if you have poor credit, it will impact your ability to get credit.
So, what is a credit score?
A credit score is a numerical calculation that calculates your credit risk. You can think of it as a score that looks at your debt repayment history and borrowing behavior.
It essentially tells the lending institutions how risky your credit is. The higher the number, the better.
Why Does Your Credit Score Matter?
Credit scores are calculated for each of the three major credit bureaus, which are Equifax, Experian, and TransUnion. This means that the information you are providing about your credit is being recorded by all three entities.
When you apply for credit, lenders will take your score into account. This may give you more or less of a chance of qualifying for a credit card, auto loan, or mortgage.
To improve your credit score, you can do one of the following:
- Pay off your credit cards
- Pay down your debts and increase your credit utilization ratio
- Improve your credit score with a new credit card account
These are the most popular ways to improve your credit scores. But there are other ways to improve it, too.
How to Improve My Credit Scores Fast?
There are four primary ways to improve your credit score. The first two methods involve simply paying your bills on time and keeping your credit utilization ratio low.
The third option involves establishing a new credit account. The other two options are more involved but ultimately may improve your credit score in more ways than you can imagine.
- First, pay your bills on time. Every time you pay your credit cards, utility bills, cell phone bill, or other accounts on time, you will score points that will improve your credit score.
- Second, keep your credit utilization ratio low. If you have a high utilization ratio, your credit score will be lower. That is why many credit card companies will not give you more credit or charge you more interest when you have a high credit utilization ratio.
- Third, establish a new credit account. Every time you open a new credit card or a loan, you score points. It is similar to the first option, but it is more involved. You will need to read and sign up for an account, get to know the rules of the credit card company, and keep an eye on your spending to make sure you don’t overextend yourself.
- Fourth, improve your credit score through other actions, like paying your bills on time. This will improve your credit utilization ratio and it will improve your overall credit score.
Now, what if you can’t improve your credit score by just paying your bills on time?
If you are one of the nearly 100 million people that are paying late or high balances on their credit cards, don’t despair. The good news is that you can still increase your credit score by doing other things.
For example, if you pay off your credit cards and stay below your credit limit, you may have to give up something. For example, you may have to put a payment on hold when you want to make a trip. But this can ultimately help your credit score.
So, what can you do if you have high credit card balances?
If you are paying your credit card bills on time and keeping your credit utilization low, you can always put an interest-free balance transfer on your credit card. If you have high balances, you may need to pay higher interest, but the lower the interest rate, the more money you save by switching.
You also may want to consider signing up for a balance transfer card if you are having trouble making minimum payments on your high balances. Many cards will allow you to transfer your credit balances without any interest or penalty.
What if you have low credit card balances, like if you pay more than the minimum balance?
When you have low credit card balances, you will pay interest. If you pay your balance in full and avoid late payments, you can still increase your credit score by paying your bill in full. You also can improve your credit score if you limit your revolving debt.
You may want to consider opening a secured credit card with a low limit, such as $300, so you can keep your debt low. If you need to put a payment on hold, that may be acceptable.
You also can try to refinance your high-interest credit card balance. That will lower your monthly payments and give you time to pay off your credit card balances.
If you have high balances on your student loans, try to get those on a repayment plan. This will prevent you from accruing interest and having to pay a higher monthly amount. You will also be able to pay down your student loans in a faster way by using some of the funds on your credit cards.
If your card issuer lowers your credit limit or raises your interest rate, this may be due to something else than your credit score. Look into your credit report to make sure it is correct and that there are no errors.
If there are, you can work with your issuer to fix the errors. There may be additional actions you can take. However, I recommend doing nothing to hurt your credit score. Just pay your bills and stay on top of your finances.
Common Credit Card Mistakes
After you review your credit score and it is accurate, make sure you do not make any of these common credit card mistakes.
Shopping for credit cards without researching the APR
You will want to make sure you get the lowest interest rate on your credit card. That is the best way to increase your credit score quickly. However, you must ensure that you get the best interest rate on your credit card.
Make sure you research the APR before applying for a credit card. This is not as difficult as it seems, as many credit card companies post their interest rates on their websites. By comparing the interest rates, you can find the best deal.
Paying late on your credit cards
When you are facing a short-term need, you should make every effort to pay your credit card balance in full. However, you should not wait until you have to write a check for the full amount. It may be tempting to leave your balance at zero for a little while, but this will lower your credit score.
If you are not paying your balance on time, you will cause your credit card company to reduce your credit limit. Additionally, you may be rejected for a credit card or have your credit score negatively impacted.
Opening too many credit cards
You want to make sure that your credit card balances are manageable. The reason is that the greater your credit card balances, the more interest you will pay. You want to avoid this trap by avoiding opening too many credit cards.
In addition, you want to make sure that you do not have more than two credit cards. If you have more than two credit cards, you will lose the introductory 0% APR offers and you will be charged interest on those balances.
When you miss a payment, you will cause your credit score to decrease. Your credit score is calculated by using your payment history. The higher your payment history, the better your credit score.
Also, you want to pay your credit cards on time so that you do not appear to be a bad debtor to creditors. Paying late will hurt your credit score.
Packing on debt by taking out a new credit card
Before applying for a new credit card, you want to make sure that you do not have a high credit limit. That is because the higher the credit limit, the more likely you will use your credit card. Therefore, you will be charged higher interest rates and may be rejected for a credit card.
After applying for a new credit card, you want to make sure that you do not add to your existing credit card debt. Anytime you take out a new credit card, it will lower your credit limit. That will cause you to make payments on that debt faster.
Additional Ways to Improve Credit Score Fast
Many factors can impact your credit score. These factors can include:
- Credit utilization
- Credit mix
- New credit
- Debt repayment
- Carrying balances
Improving your credit score can be a slow process. However, some actions can be taken to improve your credit score quickly and at little cost.
Here are 5 tips to help you improve your credit score.
Maintain a good payment history
This is the single most important factor in your credit score. If you have a good history of paying your bills on time, your credit score will be higher.
Keep in mind that credit scores are the average of your history with all credit, including credit cards, loans, and loans on credit cards. If you have a history of late payments, your credit score will be lower.
Lower your credit utilization
If you are carrying a lot of credit card debt, your credit score is likely to be higher. However, you will have to keep your credit utilization low.
Your credit utilization is the total amount of your credit lines divided by the total amount of revolving credit. Your credit utilization can be 20% or more and still have a good credit score. However, you will have to pay a higher interest rate and it will take longer to repay your debt.
Limit your credit mix
Do not max out your credit cards and should limit your credit line with high credit limits. This will help you lower your credit utilization.
Focus on your primary credit lines
Prioritize your primary credit lines by paying your bills in full. This will improve your credit score. For example, if your primary credit lines are from a mortgage and a car loan, you should focus on paying those bills in full and not accruing interest.
Reduce debt repayment
If you have a high amount of credit cards or loans, you can focus on paying off your highest-interest card first. Then you can work down your debt-to-income ratio by paying down the lower-interest cards.
These tips will improve your credit score faster and increase the chance that you will get a better credit card offer, lower your interest rate on your credit card, and help you make extra money from your credit cards. These five credit card tips can help you build or rebuild your credit.
It may be easier to find a credit card with a lower interest rate and an introductory 0% APR offer. However, it may take a while before you can improve your credit score. This is especially true if your credit score has a small error. Make sure to review your credit score and dispute any errors to improve your score. Have patience, and it will take time to improve your credit score.