Credit scores are important. They can be our ticket to getting a good rate on a mortgage, a car loan, or refinancing your home. Your credit score also can make or break a rental application, or prevent you from accessing affordable housing programs. And while I do think that a lot of people tend to freak out a little too much about their credit scores, having a healthy one is a reasonable concern.
So what can you do if you want to raise your credit score? First, it helps to know a little about how they work.
Credit scores are made up of several factors. The most important ones are a history of on time payments and your utilization rate. Unfortunately, once you’ve made late payments, they stay on your credit report for 7 years. Even one missed payment will have a big impact on your credit score, and unfortunately will have a negative impact until it falls.
You have more power to change your utilization rate, and this can make a big difference. Your credit utilization rate is a function of how much credit you have offered to you versus how much of that credit you are using. So if you have $10,000 in credit and you have $8,000 in debt, your utilization is at 80%. Ideally, you should keep your utilization rate under 35%.
Other factors that impact your credit score are your average age of credit, the mix of credit lines you have, and the number of new inquiries you have. A longer credit history and age of accounts will have a positive impact on your score. Having a mix of types of credit has a positive impact as well, for instance having installment loans like student loans or a mortgage as well as credit cards. (Unfortunately many of us have seen a decrease in our credit scores when we’ve paid off a loan, but typically this is short-lived and your credit score will bounce back.) As for inquiries, it’s best to space out hard pulls so that you don’t have multiple inquiries within a 90 day period.
When we have credit card debt and other competing needs, like bills and food, it can be hard to move the needle that much overnight. We can’t do anything about the passage of time, and sometimes we have to wait 7 years to see a missed payment disappear. We can’t control the length of our credit history or age of accounts, so all we can do is keep the accounts in use and in good standing, make sure to use our revolving credit lines, and pay down existing debt to improve your utilization.
So what can you do? Here are 3 things you can do to increase your credit score.
Reduce your utilization by making extra payments.
The good news is that as you reduce your utilization, even incrementally, you should see an improvement in your score over time. If you can save a few bucks per week by taking the subway more and eating out less, and you throw that money at your credit card debt, it should make a difference.
Sign up for Experian Boost.
This is most helpful for people who have what’s called a “thin” credit profile, which just means that there isn’t a lot on your credit report, good or bad. If this is the case, signing up for Experian Boost can thicken it a bit. Basically, you link your bank accounts to Experian, and it identifies recurring bills. As long as you have bills to link, like utilities, phone, or even Netflix, these on time payments will count towards your score. (FWIW, those with a longer and richer credit history may not see a bump, but those with a shorter and thinner history can see a substantial increase.)
Sign up for an additional line of credit strategically and responsibly.
If you are just starting out or repairing poor credit, sign up for a secured credit card so you can build credit by making on time payments and establishing what will one day be a lengthier credit history. If you have high interest credit card debt, consider applying for a debt consolidation loan, which will reduce your utilization and improve your mix of credit. If you have ok credit but your utilization is high, sign up for a balance transfer card that will improve your utilization. If you have good credit but want to bump it up, apply for a rewards card to get the bonus, and then pay it off in full each month.
Stop using your credit cards while you are paying off debt.
Not only does using your credit card while you are paying it down prevent you from improving your utilization, it is also demotivating when you never get to see the number go down. You need to see those numbers go down to stay motivated, and it’s hard to do that when your numbers won’t seem to budge.