A low credit score can make life tough, but the good news is that there are steps you can take to improve it. A higher credit score means better loan deals and more opportunities.
In this article, we provide you with ten easy-to-implement strategies you can use to increase your credit score. Plus, we’ll break down the basics so you can understand and improve your financial game.
10 Proven Strategies for Improving Your Credit Score
1. Build Your Credit Score: Three Foolproof Ways
Improving your credit vs building a credit from the ground up can mean two different things; let’s first explore the latter before delving into the former.
Here are three guaranteed ways to establish a solid credit score from scratch, particularly if you’re starting out on your financial journey.
A. Secured credit cards
Secured credit cards are perfect options for people with bad or no credit history. Unlike unsecured credit cards, they require a deposit, which serves as your credit limit. As you make on-time payments, your credit slowly improves.
To get a secured card, you will need to contact a credit card company and apply for one. The company will likely require you to make a deposit, typically between $200 and $500. Your credit limit will be the sum of money deposited.
Once you have a secured credit card, make all your payments on time and in full to easily build your credit score.
B. Credit builder loans
Credit builder loans are small loans, typically between $500 and $1,000, designed to help people with a limited credit history, or none at all, build a good credit file.
You repay a credit builder loan over 6-12 months, typically in monthly installments. This financial product improves your credit score by building a positive payment history and diversifying your credit mix.
To secure a credit builder loan, contact a bank or credit union and apply. You might need a cosigner or collateral. Once approved, the loan amount is deposited into a savings account. Monthly payments are made, and you receive the loan amount plus interest at the term’s end.
C. Get credit for rent and utility payments
You can also increase your credit score by getting credit for your on-time rent and utility payments. This is an effective way of building credit as it establishes a positive payment history and diversifies your credit mix.
There are a few ways to get credit for your utility and rent payments. One option is to use a service like Experian Boost™ or eCredable Lift. These services connect to your bank account and automatically report your on-time rent and utility payments to the credit bureaus.
Another option is to check with your landlord or utility company to see if they offer a credit reporting program. Some landlords and utility companies directly report rent and utility payments to the credit bureaus.
If you can’t find a credit reporting service or program, report your rent and utility payments to the credit agencies yourself by contacting each bureau and providing your payment history.
2. Pay Bills on Time
Paying your bills on time is one of the most important things you can do to build and maintain a good credit score. Payment history makes up more than 30% of your credit score, so making on-time payments is essential for improving your credit.
Important: Missing a loan or credit card payment by more than 29 days can be reported to the credit bureaus and lower your score.
Simply paying your bills on time and avoiding late payment fees can drastically improve your credit rating and protect your credit from substantial damage.
Set up automatic payments to have your bills paid automatically before their due date. This eliminates concerns about forgetting to pay a bill or encountering late payment issues.
Most banking services offer automatic payments and are usually easy to set up. You can typically set up automatic payments online through the banking app or over the phone.
You can also set up automatic due-date alerts reminding you when a bill is due, or your account balance falls below a certain amount.
Our preferred automatic payment tool is the ‘Safe Pay’ from Varo Bank.
Tip: When setting up automatic payments, choose a payment date that is at least a few days before the due date. This will give you enough time to make sure that the payment has gone through.
3. Manage Credit Card Balances
Credit utilization is the percent of the total credit available to you that you are currently using. It is an important factor in your credit score, and a low credit utilization ratio is generally seen as more favorable by lenders.
To find out your credit utilization rate, divide your total credit card debt by your overall available credit. For instance, if you have $1,000 in credit card debt and $2,000 in total available credit, your credit utilization rate is 50%.
It is recommended to have your credit utilization ratio below 30%. You can do so by:
- Using less than 30% of your available credit.
- Requesting a credit limit increase to increase the available credit.
A higher credit utilization rate negatively impacts your score and makes it harder for you to qualify for loans and other lines of credit at favorable terms and competitive interest rates.
Pay credit card debt down as quickly as possible, as it is crucial to your credit health. The more debt you have, the worse your credit score will be. Additionally, credit card debt can be expensive, as credit card interest rates are typically rather high.
4. Remove Negative Items From Your Credit Report
The first step to removing negative items from your credit report is to inspect it for errors. You can get one free copy of your credit report annually from the three major credit reporting agencies at annualcreditreport.com.
If you find inaccurate information on your credit report, dispute it with the major credit bureaus. You can also dispute any items in your credit activity that you believe are the result of identity theft.
Consider removing collection accounts through pay-for-delete agreements with creditors. Explore removing late payments that are over seven years old or those due to errors or explainable circumstances.
>> Read our in-depth guide on How to Remove Negative Credit Report Entries
5. Become an Authorized User
Becoming an authorized user improves your credit score by using someone else’s positive credit history. When you are added as an authorized user to someone else’s credit card, their credit history is added to your credit report, which helps improve your credit score.
Become an authorized credit card user by getting added to someone else’s credit card account. The primary cardholder can add you to their account online, by phone, or by mail.
Once you have been added as an authorized user, you will get access to their credit card account. You can use the card to make purchases, although the primary cardholder remains responsible for paying the bill.
In finance, this practice of becoming an authorized user to boost your credit score is also known as credit piggybacking.
Q. What is an easy way to become an authorized user?
Tradeline companies, often known as “tradeline” or “credit tradeline” companies, present a quick way to become an authorized user. These businesses connect people with good credit history (primary cardholders) with people looking to improve their credit score (authorized users) for a fee.
But beware, some Tradeline companies may charge high fees and not be reputable, but we have three recommendations that are trustworthy and affordable: Tradeline Supply Company, SuperiorTradelinesSup, and CreditPro are three of the best tradeline companies available today.
6. Diversify Credit Mix
There are two primary kinds of credit: installment and revolving. Installment credit is the credit where you borrow a fixed amount of money and repay it in equal payments over a period of time. Examples include mortgage loans, car loans, and student loans.
Revolving credit is a type of credit where you have a credit limit and can borrow money up to that limit. Examples include credit cards and home equity line of credit (HELOC).
Having both installment and revolving credit can be beneficial for your credit score. It proves to lenders that you can manage different types of credit responsibly.
This mix, or more specifically, a ‘Credit mix,’ refers to the diversity of line of credit you have or the different types of credit accounts you possess. Lenders prefer borrowers with a diverse credit mix, which shows you can manage different types of credit responsibly.
To boost your credit score, diversify your credit mix, consider getting a secured credit card, applying for a student loan, getting an auto loan, or opening new lines of credit.
>> Read up on How To Finance a Car With Bad Credit
7. Lengthen of Credit History
A longer credit history is generally beneficial for your credit score. The reason is that it shows lenders you have a longer track record of responsible credit management.
A longer credit history can help you qualify for decreased interest rates and better terms on loans and credit cards. This is because lenders are more likely to view you as a lower-risk borrower if you have a long history of responsible credit use.
One of the best ways to lengthen your credit history is to keep your old accounts open. Even if you don’t use them often, keeping them open shows lenders that you have a long history of managing credit responsibly.
Closing an old account can harm your credit score in two ways: It lowers the average credit age of all your accounts, and it increases your credit utilization ratio (a lower ratio is preferred).
Note: Closed accounts stay on your credit report for 7-10 years and can affect your score, but not as much as open accounts.
8. Use Debt Consolidations
Debt consolidation is defined as the process of merging multiple debts into a single new debt, ideally with a longer repayment term and lower interest rate. This can be a good way to lower your monthly payments and make it easier to manage your debt.
Two ways to consolidate debt:
Personal loan: You can take a personal loan – a debt consolidation loan – to pay off your existing debts. Typically, personal loans feature lower interest rates than credit cards, giving you more time to repay your debt.
Balance transfer credit card: Transfer your existing credit card balances to a new card featuring a zero percent interest introductory period to save money on interest. This can give you a break from paying interest on your debt for a period of time.
Important: While debt consolidation can improve your credit over time in the long run, it can lower your credit score in the short term because it triggers hard inquiries and shortens your average age of accounts.
9. Build Positive Credit Habits
Do not open too many credit accounts: when you apply for new credit accounts, such as a loan or a credit card, a hard pull (aka hard inquiry or hard credit check) is placed on your credit report, which temporarily lowers your credit score. Therefore, it is recommended not to submit credit applications to open many credit products frequently.
Opening a new credit account also decreases the average credit age of all your accounts, which is a factor in your credit score. The longer your credit history, the better your credit health.
Create a budget and financial plan using a mobile app or budgeting services offered by your bank to track your income and expenses to ensure you are not overspending and can save for unexpected expenses.
Create an emergency fund of 6-9 months’ living expenses to avoid debt when unexpected expenses arise, such as job loss or medical emergencies.
When you have budget plans and emergency funds, you are more likely to be able to make all of your future payments on time and in full. This is important because late and missed payments can have an adverse effect on your credit situation and result in bad credit scores.
Implementing these simple positive credit behaviors can go a long way in establishing a robust financial future.
10. Seek Professional Help
Credit counseling services assist you in developing a budget and financial plan, creating a debt management plan, and negotiating with creditors. Credit counselors can also provide you with education about credit and debt management.
Credit repair companies can aid in identifying and disputing errors on your credit report. However, it is important to note that credit repair companies cannot guarantee that they can improve your credit rating, and their services can be expensive.
Caution: Credit repair services are often criticized for their misleading advertising and for charging high fees. Some credit repair companies have also been known to engage in illegal practices, such as removing accurate information from credit reports.
If you decide to work with a credit repair company, do ample research and pick a reputable agency. The two companies we recommend are Credit Saint and The Credit People.
Credit Score 101: A Brief Overview
What is a credit score?
A credit score is a 3-digit number that represents a person’s creditworthiness based on a comprehensive analysis of their credit history.
This numerical value is based on the information in credit reports, which is recorded by TransUnion, Equifax, and Experian, the three prominent credit reporting agencies in the US.
What Are the Components of a Credit Score?
The following are the biggest factors that affect credit score:
- Payment history: A history of timely full payments is the most important factor
- Credit utilization: Ratio of outstanding balances to available credit. Lenders prefer low credit usage.
- New credit inquiries: Hard inquiry is made when new loans or credit cards are applied. They temporarily lower your credit score.
- Length of credit history: The longer your credit history, the better.
- Types of credit: A mix of different kinds of credit helps boost your credit score.
What Is a Good Credit Score?
Credit scores range from 300 to 850. A good credit score is considered to be 670 or higher. An excellent credit score ranges from 800 to 850, and anything below 580 is considered to be a poor credit score. However, what makes a “good” credit score can vary depending on the lender.
To check your credit score for free, use a reputable credit score service like Creditkarma.com or Creditsesame.com.
What Are the Common Credit Scoring Models?
FICO and VantageScore are the top two credit scoring models in the United States. Both models use information from your credit report to calculate your score, but they use different scoring algorithms and weigh the factors differently.
FICO scores are used by most lenders in the United States, including banks, card issuers, credit unions, auto lenders, and mortgage lenders. FICO scores span from 300 to 850.
VantageScore is a newer credit scoring model that is becoming increasingly popular. VantageScore scores also range from 300 to 850, but they are generally higher than FICO scores.