There’s a certain three-digit number that can make all the difference between being denied or approved for credit, and whether you’ll receive a low or high interest rate. That number is called a credit score, and it’s derived from your payment history, accounts owed, length of credit history, types of credit used and other factors.
Many of the credit-related decisions you make can have an impact on your credit score. For example, skipping a payment on a credit card bill can have a negative impact on your score. Your credit score defines you financially, and if you do something to negatively impact it, you could face a risky financial future with poor credit.
“A low score warns lenders that you might be an unreliable borrower, which can thwart you from getting the credit you need,” writes Credit Karma contributor Jenna Lee. “A high credit score can save you tens of thousands of dollars in interest over the life of your loans.”
So, how can you build up your score in the unfortunate event it’s not where you’d hoped? Read on for expert advice on improving your credit score.
Get rid of small balances on several cards. “A good way to improve your score is to eliminate nuisance balances,” says John Ulzheimer, president of consumer education at Credit Sesame. “That way, you’re not polluting your credit report with a lot of balances.”
Since your credit score takes into account how many of your cards have balances, charging a few dollars on one card and then a few on another, instead of using the same card to make multiple purchases, can negatively impact your credit score. To build your score up again, pay off all the small balances you have on your cards, and then use just one or two cards for the majority of your everyday purchases.
Pay bills on time. If you’re skipping payments or paying them late, your credit will suffer. If you’re struggling to pay bills by their deadlines, try setting reminders on your smartphone or leaving sticky notes on your desk with the payment information and deadline for all your bills. Or hire a financial planner to help you get organized, which will help with paying bills on time.
“It isn’t necessarily hard — it just takes discipline,” says Hitha Prabhakar, a retail and consumer analyst and spokesperson for Mint.com.
Keep old debt. It sounds counterintuitive, but it’s actually better for your credit score if you leave old debt on your report. Some of that debt is good for your score, and trying to get older accounts off your credit score simply due to the fact that they’re paid off isn’t wise either.
Why? The longer your history of good debt, the better it is for your credit score. When you attempt to eliminate old good debt, it’s like getting great grades throughout school and trying to get your records erased down the line. You want to keep it around.
Get rid of student loans. If feasible, try to pay off those pesky student loans in a timely manner.
“If you pay your student loans in full and on time each month, the credit bureaus will make a record of that on a continuing 30-day basis,” writes contributor for NerdWallet Divya Raghavan. “And that will demonstrate to future lenders that you can be trusted to handle money responsibly.”
Keep new accounts to a minimum. Every time you open a regular or retail credit card, or even just apply for one, your report is looked at to determine whether or not you’ll receive the credit.
“Since a lot of hard inquiries may make it look like you’re desperate or aren’t getting approved for credit, it’s best to minimize how often you apply for more credit,” says Lee.
“You just don’t want to do anything that would indicate risk,” explains Dave Jones, retired president of the Association of Independent Consumer Credit Counseling Agencies.
Your credit score is an important part of your financial success. Stop by today to let us know if you have any questions.