Ways to Increase Your Credit Score
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How to Improve Your Credit Score

Your credit score has a large influence on your purchasing power as a consumer. With a good credit score, you can enjoy lower interest rates from lenders, better refinancing options for your mortgage and more leverage to negotiate major purchases. The higher your score is, the more freedom you have as a buyer and a borrower.

Your FICO score, which is the score lenders use most often to determine your risk as a borrower, depends on five factors, each of which is weighted in the influence it has on your score: payment history (35% of your score), how much you owe (30%), the length of your credit history (15%), your mix of credit (10%) and your new credit (10%). Having all these components together produces a strong credit score.

If you don’t have the kind of credit score that would make you an attractive candidate for a substantial loan or a credit card with great perks, don’t despair. Consider these simple tips to turn your credit score around.

Check your credit report

The first step toward improving your credit score is regularly checking your credit report. You’re entitled to one free credit report each year from the three major credit reporting companies: TransUnion, Experian and Equifax. You can obtain all three at www.AnnualCreditReport.com. Examine your credit reports closely for any errors that could affect your credit score or any evidence of identity theft and dispute any inaccuracies in writing immediately.

You may have heard that checking your credit report will lower your credit score, but that’s only partially true. Your credit score will likely take a slight hit when you apply for some form of credit and a lender must review your credit report—this is also known as a hard inquiry. But checking your annual report will have no negative effect on your credit score because the credit bureaus don't consider it a hard inquiry.

Pay your bills on time

Paying your bills on time is one of the most effective ways to boost your credit score. You need to make your mortgage, loan and credit card payments in a timely manner to ensure your credit score remains in good standing. Sign up for text or email reminders to give you a nudge when your bills are due. If possible, set up automatic payments for your credit card and other accounts. The money will be deducted on or around the same date each month, which ensures your bills are paid on time for the amounts you determine.

When it comes to credit cards and other loans, ultimately your goal is to pay them off in full. If you have the resources, you should try to pay more than the minimum on your credit card bill each month. This lowers your balance—and the interest you'll pay over time—faster. You can also make payments twice a month instead of once a month to get a jump-start on lowering your balances.

Lower your credit utilization ratio

Maxing out your credit cards will lead to a drop in your credit score, regardless of whether you pay your bills in full every month. Using all your available credit will raise your credit utilization ratio, which compares the balance you owe to your credit limit on a card or account. Experts generally recommend maintaining a credit utilization ratio of no more than 30% across all accounts. For example, if you have $5,000 in credit, you'll want to carry a balance no higher than $1,500 to maintain a 30% utilization rate.

Aside from paying down your balances, another way to lower your credit utilization ratio is to request an increase in your credit limit. If you have a $1,000 credit limit and a $500 balance on a card, getting a credit limit increase to $1,500 and maintaining a $450 balance drops your credit utilization rate on that account to about 30%. Keep in mind that if you compensate for a greater limit by spending more, you’ll end up at square one and you won't see any positive impact on your credit score.

Diversify your credit

Opening a new credit card or account may seem counter-intuitive in boosting your credit score, but demonstrating that you have a mix of credit is another way to raise your score. Gradually develop a mix of personal loans and credit cards. As long as you practice discretion and don’t apply for too many things at once, you’ll be making a smart move toward a better credit score.

As you diversify your credit, don’t forget about your old credit cards or accounts. They must be used with some regularity so you can stay in the clear. Only cancel old cards if they have an annual fee you can’t afford.

Building up a good credit score takes time. Fortunately, you can improve a low credit score with regular effort, like planning to pay off your balance within a certain amount of time, and create helpful new financial habits in the process.

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