Even though saving rates systemically recovered during the pandemic due to government stimulus checks and fiscal policies, almost 1 in 4 Americans still have a “poor” credit score (<580). If your credit score is lower than you like, take heart, you are not alone. There are several (fast) ways to boost your score, which makes you more attractive to lenders for things like mortgages, car loans and credit cards.
But you need a game plan first.
How can you increase your credit score?
Tip #1 - Review your credit report
The three major credit bureaus – Equifax®, Experian® and TransUnion® - all offer free annual reports. It’s important to review your current score and understand what these companies are reporting for your financial health. You should dispute any known credit errors or correct any incomplete information. Errors could be negatively impacting your score, such as:
Indications of a late or missed payment even though you paid on time
Someone else’s credit history mixed in with yours
Hard line credit inquiries that you didn’t authorize
Loan balances that seem too big/inaccurate
Accounts that you didn’t open
Any other suspicious activity
Tip #2 - Pay your bills on time
This may seem like an easy one, but 35% of your credit score stems from your payment history. Failing to pay your bills on time has a huge impact on your overall credit score. Most creditors will report a late payment that is 90 days or more past due (some only 30 days delinquent). Once reported, your credit score could lose 100 points! If you forget to make payments, consider setting up an auto-pay schedule to pay your bills on time. If you realize you missed a payment, contact your credit lender, and rectify it as soon as possible. The later the payment, the worse the impact to your credit score. Delinquent payments can stay on your credit report for 7 years.
35% of your credit score stems from your payment history
Tip #3 - Request a credit limit increase
When your credit limit goes up, but your monthly balance stays the same, it instantly lowers your credit utilization. Credit utilization ratio, or % of credit available that’s actually in use, impacts your credit score. Paying down debt is one way to reduce credit utilization; but requesting a credit limit increase is another way! This increases the denominator instead of decreasing the numerator. Most credit card companies will routinely ask for updated financial information, such as annual salary. But if you contact the card provider, they can issue a credit limit increase at any time. They may run a credit check before approving the higher limit, which could ding your score (~5 points), but the increased credit will reduce your utilization ratio (assuming you don’t overuse your new limit) and improve your overall credit score.
Creditors generally want to see a utilization ratio below 30%.
Example: If you have a credit limit of $20,000, but have a monthly spending balance of $10,000, you are above a lender's ideal threshold with a 50% utilization ratio. But someone with a $6,000 credit limit who only spends $1,000 per month has a better ratio. Even though their credit limit is lower, they maintain a smaller ratio and thus a healthier financial picture for creditors.
The highest FICO scorers utilize <10% of their authorized credit per card each month.
Tip #4 - Become an authorized user
An authorized user is someone who is added to an existing credit card account. If your parents or grandmother have a better credit score and are willing to add you as an authorized user, their credit can help yours! When you are added as an authorized user on their credit card, then their credit history is added to your report. Authorized users can use the card but will not be responsible for payments. Their good history of on-time payments (and continued good behavior) will boost your score. Just make sure the account gets reported to all three credit bureaus. The “credit piggybacking” is a great way for a credit newbie to pad their financial history. Just make sure you don’t mess up the main cardholder’s credit, as they are ultimately responsible for any of your spending on their card.
Tip #5 - Pay off your debt, but do it strategically
There are generally two methods for paying off debt: debt avalanche and debt snowball.
With the debt avalanche method, you focus on paying off your highest interest rate debt first, followed by the next one and so on. However, you must maintain minimum payments on all the other debt in order to avoid compounding issues later.
With the debt snowball method, you focus on paying off the smallest debt balances first, while still maintaining minimum payments on the rest. The method helps build momentum and confidence as you get a sense of achievement.
The debt avalanche method will save you in the long run since your highest interest debt is being tackled first. However, both methods will ultimately help reduce your credit utilization ratio and improve your credit score.
Bonus Tip - Avoid closing old accounts
Remember, the length of payment history can account for 15% of your overall credit score. The longer you have the better, as long as it doesn’t include negative behavior like delinquencies, collections, write-offs, bankruptcies and foreclosures. If the credit card does not have an annual fee, then keep it open. Simply use it once a year to keep the line of credit “active” and its history added to your financial report. Long lapses in the use of certain credit can also impact your FICO score, so there is a balance to keeping old accounts open and in (even limited) use.
Lastly, hard credit inquires stay on your credit report for two years. Patience is a virtue, but remember each month is a new start to bettering your credit score. Forming good spending habits and understanding how credit utilization ratios work will all pay off in the long run!
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