How to Improve Your Credit Score

Your credit score affects many aspects of your finances, from the interest rate you receive on loans to whether or not you need to put down a deposit for your utilities. A higher credit score allows you to receive more favorable terms from lenders, which can help you save money and decrease stress. However, a low score can have some pretty major impacts on your finances. That’s why it’s important that you know exactly how to improve your credit score.

If you need assistance with your finances, work with a professional financial advisor from Good Life Financial Advisors of Mt. Pleasant. We’re ready to help create a personalized plan for your specific needs!

What is a Credit Score?

Your credit score is a number between 300 and 850 that lets lenders know how likely you are to pay them back on time. The commonly accepted bottom of the “excellent” range (the top category) is 720. Ideally, your credit score should be at least 720, but if your credit score is considerably lower, you may be facing negative financial consequences.

Find and Dispute Errors

The first step in improving your credit score is to look for errors, as they’re more common than you might think. In order to make sure there are no errors on your credit report, you can request a report from the three major credit bureaus: Equifax, Experian, and TransUnion. You can then dispute any errors you may find and request that they be removed. Once you submit a dispute, the credit bureaus are required to investigate and respond within 30 days.  

Keep Credit Utilization Low 

A major component of your credit score is your credit utilization ratio. Your credit utilization ratio is the ratio between the credit you’re currently using and the maximum amount of credit you can use.

One way to improve your credit utilization ratio is to keep the amount of credit you use low. Even if you pay off your credit card bill in full each month, by making smaller payments throughout the month instead of one bigger payment each month, you’ll keep the amount of credit you’re using lower.

Increase Your Credit Limit 

A different way to improve your credit utilization ratio is to increase the amount of credit you have available. In order to increase your credit limit, you can call your credit card company and ask about increasing the limit on your existing card. In theory, you can also look into opening another card, but this second option may have some unintended consequences.

When you apply for a credit card, this counts as a “hard inquiry.” Too many hard inquiries can hurt your credit score. Plus, having more credit cards may also encourage you to spend more money. The key to improving your credit score using this method is to increase your limit while keeping your balance the same. Otherwise, your credit utilization rate will not improve, and therefore neither will your credit score.

Pay Off Debt 

If you have debt, especially credit card debt, this will also affect your credit utilization ratio. Paying off debt may not be easy, but it can have a major impact on your overall credit score. If you have a lot of debt, even smaller payments that chip away at the debt can improve your credit score. 

Pay Bills on Time 

Since your credit score is a measure of how likely you are to pay future lenders back on time, it should come as no surprise that your history of paying lenders back on time is an important part of your credit score. Whenever possible, pay your bills on time. This not only includes credit cards, car payments, and student loans, but it also includes rent, utilities, and even your phone bill. If you have difficulty remembering to make these payments, there are many different tools that can help, such as setting up automatic bill pay. 

Don’t Close Old Credit Cards

This goes back to the credit utilization ratio. While opening new credit cards may potentially hurt your credit score, leaving old cards open and using them only occasionally can help improve your credit score. This strategy only helps if you won’t rack up debt. If you can’t resist overspending with old credit cards, then it’s not worth keeping them. 

Take Advantage of Responsible Friends or Family

If you have very little credit history, one way to improve your credit score is to become an authorized user. Being an authorized user means that your name is added to the credit card of a friend or family member with an excellent credit score. You don’t have to ever use the card, or even have access to the credit card number.

The issue with this strategy is that you may struggle to find someone willing to let you be an authorized user. Since the other person will be responsible for any financial mistakes you make, this may be a risky option for them.

Seek Assistance from a Financial Advisor

It’s important to know how to improve your credit score. However, how long it takes to see improvement will depend on which strategies you choose to use, what your current credit score is, and how much you’re hoping to improve your credit score. The more time you have, the better. If you’re planning on making a major purchase soon, such as a home, and will need to take out a loan, the sooner you can begin improving your credit score, the better. To create a personalized plan to improve your credit score and your finances, speak with a team member from Good Life Financial Advisors of Mount Pleasant today.

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