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Best Ways to Improve Your Credit Score

Your credit score is used by lenders to determine what type of borrower you are. It shows lenders how you handle your credit lines, such as credit cards, retail store cards or auto loans. This three-digit number can affect your life in many ways. Maybe you’re looking for a new car. Or maybe you want a killer travel credit card to help you get to Thailand next summer. Whatever the reason, knowing your credit score is important.

If you’re applying for new credit such as a mortgage or personal loan, the lender will likely require that you have a certain credit score. With a higher your credit score, you will be eligible for better rates and other benefits.

To improve your credit score, understand the individual factors that can impact it.

Make payments on time

Payment history determines 35% of your credit score. Your payment history is based on your ability to make on-time payments to your creditors, and it is the most important factor used to determine your credit score.

To improve in this category:

  • Make your credit payments on time, every time.
  • Pay more than the minimum amount on revolving debts.
  • Prioritize and resolve the debts that can have the largest negative impact on your payment history. For example, tax liens, judgments or student loans in default.

When determining what debts to pay off first, keep in mind that certain types of debts will remain on your credit report for 7-10 years, such as bankruptcy or foreclosure. This is known as derogatory payment history. 

 

Make your credit payments on time, every time.Don’t use all your available credit

Amount owed determines 30% of your credit score. The amount owed is based on how much of your available credit is in use.

To improve in this category:

  • Keep balances on revolving accounts below 30% of the total credit limit.
  • Periodically request for your credit lines to be increased. This will help to lower your overall credit utilization ratio.
  • Consider consolidating revolving accounts into a single installment debt, but don’t close the accounts as that would lower your available credit.

Having a high credit utilization ratio negatively impacts your credit scores, and having a low utilization ratio positively impacts your credit scores. However, not utilizing your available credit at all doesn’t help your scores as much as the responsible use of credit does.

Keep building your credit history

Length of your credit history determines 15% of your credit score, and is determined by how long you have been using credit.

To improve in this category:

  • Keep your oldest accounts open as they increase the average age of your accounts.
  • Avoid opening new accounts unnecessarily, as they will decrease the average age of your accounts.
  • Avoid creditors closing your accounts due to inactivity. Make small transactions on your card and pay them off in full each month.

Having a long credit history is helpful, but even if your history isn’t that long you can still achieve a high credit score depending on the other factors.

Use different types of credit

Credit mix accounts for up to 10% of your credit score. A credit mix is made up of the various types of credit you use, such as installment loans, credit cards and mortgage accounts. Having a good mix shows lenders that you responsibly handle different types of obligations.

To improve in this category:

  • Make sure you have a balanced mix of installment and revolving debts.
  • Maintain a reasonable and manageable number of accounts overall. If you have too many accounts open, it can have a negative impact on your scores.
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Avoid opening many new credit lines at once

New credit lines determine 10% of your credit score. This includes inquiries and applications for new credit that you have initiated. Know that requesting and checking your credit report won’t negatively impact your score.

To improve in this category:

  • Review your credit report regularly to help identify any errors and/or fraud right away.
  • Don’t open several new accounts in a short period of time.

When opening new credit accounts, do it conservatively and conscientiously. Keep your credit inquiries to a minimum and space them out over time so that the impact on your credit isn’t as severe.