There are easy ways to improve your credit score and improve your chances of getting approved for a low-rate personal loan, specialty credit card, or another financial product with preferential terms. To boost your credit, it is important to pay off your balance, pay bills on time, and review your report on a regular basis.
Pay Off Your Balance
To improve your score, it is a good idea to pay off your balance every month. This is a way to build a strong payment history and pay less in interest charges. Paying the balance in full also shows financial institutions that you are a trustworthy borrower. Make sure you keep your balance-to-limit (credit utilization rate) low to improve your score. This also shows banks that you can handle credit.
To establish a solid payment history or improve your score, make small card purchases on a regular basis and pay the balance on time and in full.
Build a Credit History
There are different ways to go about this, and one is to get a cosigner with a very good or excellent credit rating. This can be your mother, uncle, friend, or someone else. While applying together with a cosigner improves your chances of being approved, the cosigner is also responsible for repayment. Another option is to ask your parents or a close relative to add you as an authorized user on their card. In this case, you are not responsible for repayment, and it is important to handle credit responsibly. A third option is to apply for a department store card and make small purchases. Department store cards usually go with higher interest rates, but responsible use can help build credit. There are added benefits for customers, including discounts on merchandise, rewards, and freebies. Customers also benefit from deal updates and coupons which many stores send by mail. Some department store cards go with higher limits than standard cards, and it is best to avoid splurging.
Get a Secured Credit Card
This is a good way to improve your score, and the best part is that a secure card works like standard cards. You can use it to:
- Make payments in-store
- Make payments online
- Make purchases
- Book a hotel room
You are free to pay the outstanding balance on or before the due date. Like standard cards, interest charges apply if you only pay the minimum or don’t pay the balance in full by the due date. The main difference between secured and unsecured cards is that you will be asked to make a cash deposit. The credit limit will be equal to or less than the cash deposit made. Basically, the deposit serves as collateral in case that you are unable to pay off the balance. Again, the best strategy is to make small purchases and pay the full balance. A secured card will help you improve your score and what is more, there are added benefits such as low annual fees, low introductory interest rates, no credit check, discounts on gas, and more. Some issuers also offer optional features such as travel insurance, identity protection, and roadside assistance.
Keep in mind that some financial institutions have a minimum income requirement for both unsecured and secured cards. Your application may be declined if you have declared bankruptcy during the past 7 years.
Pay Utility Bills on Time
Obviously, it is important to pay your bills in a timely manner, including utility bills such as gas, electricity, phone, water, etc. Late payments will hurt your credit score. While paying bills on time does not help improve your score, delinquent bills show on your report. This is especially true if you are significantly behind on bill payments. In this case, the utility company is likely to contact a collection agency and send your account to them. Collection agencies report delinquent bills to the credit bureaus, and this will have a negative effect on your credit score. One way to avoid late payments, whether credit card payments or utility bills, is to set payment reminders.
Regularly Review Your Credit Report
You may want to review your credit report on a regular basis to check for errors and omissions. You are entitled to a free copy of your report on an annual basis. Make sure you report any inaccuracies or mistakes because they can have a negative effect on your score. What is more, if you find unauthorized transactions, bank accounts that are not yours, or anything else, you will know that you are a victim of fraud or identity theft.
Limit Credit Applications
To improve your score, make sure you limit credit card applications because financial institutions place an inquiry on your report. The number of inquiries made within the past year accounts for 10 percent of your score. Multiple applications with different issuers will affect your score if they are made within a short period. In fact, many issuers are likely to reject applicants who make multiple applications. It is also a good idea to limit credit card applications if you plan to apply for a secured or mortgage loan.
Other Ways to Improve Your Score
There are other ways to improve your credit score, and one is to negotiate with your creditor to waive late fees and penalty charges, reduce the minimum payment, or reduce the interest rate. This will make it easier for you to pay the balance by the due date and thus avoid credit blemishes. Some financial institutions are willing to settle for less than what the borrower owes and will then close the account. Obviously, bankruptcy is a last resort and if possible, it is best to avoid declaring bankruptcy. It will cause your credit score to plummet, and most financial institutions are likely to turn you down, whether applying for a credit card, unsecured personal loan, or car or student loan. You should also avoid default, delinquent accounts, foreclosure, and other negative items and events.
Components of Your Credit Score
Finally, it is a good idea to learn more about the different components of your credit score, including payment history, amounts owed, and length of history. Your credit mix, for example, includes the types of loans borrowed, including auto, personal, and student loans, mortgages, specialty and standard credit cards, and others. Your credit utilization ratio is also an important factor, and borrowers with utilization ratios of up to 5 percent usually have stellar credit scores. Those with high utilization ratios have low and average scores, which shows that they have multiple missed or late payments, borrow close to the limit, and max out their credit cards. The length of your credit history is also an important indicator and makes 15 percent of your score. A long history gives an insight into and information about your financial habits, borrowing patterns, and behavior. The most important indicator is your payment history which makes 35 percent of your score. Obviously, customers who always pay the balance in full have higher scores than those who have late or missed payments.