How to Improve Your Credit Score

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Credit scores are based on the information found on a credit report. This score is a three-digit rating of your credit risk. Credit scores range from 300 to 850, with higher scores indicating lower credit risk. Credit scores can be used by creditors, lenders, utility companies, landlords, and employers, to name a few.

So, what do you do if you have a lower credit score? Let’s first consider what impacts a credit score.

There are five primary factors impacting a person’s credit score—payment history, credit utilization, length of credit history, types of credit, and credit inquiries.

Payment history. A person’s ability to pay their loans in accordance with the agreed upon terms is the most important factor of a credit score. Payments that are thirty, sixty, or ninety days past due reduces a credit score. Likewise, charge offs, liens, debt settlements, bankruptcies, and other public judgments can injure a person’s credit score.

Credit utilization. Credit utilization is the amount of credit used versus the amount available. As an example, a person using $15,000 of their $30,000 available credit has a credit utilization ratio of 50%. Higher credit utilization ratios may indicate higher credit risk and can negatively impact a score. Credit utilization is the second most important factor of a credit score.

Length of credit history. Credit scores favorably consider longer credit histories. Longer histories provide evidence of a person’s ability to manage credit appropriately. Longer credit histories can demonstrate reduced credit risk and, therefore, can increase a person’s credit score.

Types of credit. The mix of credit a person uses also impacts their credit score. Installment loans, like mortgages, are consider more favorably than revolving credit, like credit card or home equity lines of credit.

Credit inquiries. There are two types of credit inquiries—hard and soft checks (or inquiries). A hard check is used when applying for a loan or credit. Multiple hard checks within a short period of time can negatively impact a credit score. Soft checks allow an organization to see an individual’s credit score without negatively impacting the score. These may occur as part of a background check or when credit card companies look to see what type of credit offers they can provide potential customers.

Now that we’ve covered what impacts a score, let’s consider how to improve a credit score. The good news is there are ways to improve a credit score over time.

Here are some common strategies that have been shown to increase a credit score:

1. Get caught up on past due payments.

One of the first steps a person can take to improve their credit score it to get caught up on any late payments.

2. Pay bills on time.

Moving forward, make sure you pay your bills on time. One of the ways you can ensure this occur is by setting up automatic payments either through the lender or through the bank.

3. Reduce credit utilization.  

High credit utilization decreases credit score. Therefore, paying off debt can be an effective strategy for increasing a credit score.

4. Fix any errors.

Sometimes, you may find an error on your report. This may be due to identity theft or some other reason. Errors resulting in a reporting of late payments, default, or higher credit utilization can decrease a credit score. Therefore, cleaning up these errors can improve the score.

If you were to discover an error on your credit report, take these next steps:

Step 1: Review all three credit bureau reports. Sometimes an error only occurs on one report. However, if the error is on multiple reports, you must work with each bureau.

Step 2: Gather all relevant documentation to demonstrate the item on the report is an error. This may include bank statements, birth certificates, or other pertinent information.

Step 3: Contact the credit furnisher. Reach out to the company that reported the error to the credit bureau. They may be able to assist you moving forward and close the account if it is still open.

Step 4. Call the credit bureau. Each credit bureau has their own phone number. Reach out to the bureau to make them aware and remedy the problem.

Step 5: Mail the credit bureau. It is possible you will not be able to remedy the problem over the phone. In this case, you will need to submit a letter and the relevant documentation to the bureau. Follow any guidance provided by the bureaus in Step 4.

Step 6: Follow up. Assume it is your responsibility to follow up on the matter.

Can you go through life without a credit report and credit score? You can. But because of the wide use of credit scores, it is important to pay attention them. You can get a free credit report from the three credit bureaus (TransUnion, Equifax, and Experian) each year through Go ahead and check out your credit report today.