9 Things You Can Do to Work on Your Credit Score

March 20th, 2020 by

credit score on modern laptop desk

Your credit score is used by many companies to decide if you get approved or how much you pay for insurance or determine your interest rate. People with high credit scores are often offered lower interest rates and better terms (like lower down payments) than people with lower scores. A poor credit score also reduces the chances that you will be approved. 

According to the Federal Reserve Bank of Philadelphia, your credit score is represented as a number that can fall within a range — usually from 350 to 850. However, some credit scoring companies use different ranges — such as 501 to 990. If you obtain multiple credit scores and the same range was not used, you cannot directly compare the scores. For example, a credit score of 720 within the 350 to 850 range is not the same as a credit score of 720 using the 501 to 990 range.

How can you work on your credit score? Here are a few tips, many from the Federal Reserve Bank of Philadelphia. 

1: Starting Right Now: Never Miss a Payment!

Missed or late payments may have already damaged your credit score. You can’t go back and fix the past, but if you commit to never missing another payment from now on, your credit score will improve. This may not be easy, but it’s the first and most important step to improving your credit. Setting up automatic or online payments can help, so use those tools to make sure you don’t miss again. [1]

2: If You MUST Pay a Bill Late, Call Before and Ask for an Extension!

Remember tip #1, you never want to miss a payment. But if you can’t avoid it, make sure you call the lender ahead of time and work something out. You might make a partial payment now and make up the rest soon, but the lender can’t help you if you don’t talk to them first. Once the payment is late, they may not be willing or able to help. [3]

3: Financing a Large Purchase.

While you want to limit the overall credit that you use, financing and paying off a large purchase like a house or car can be one of the fastest ways to improve your credit score. [4] But you’ll want to take a couple of steps to make sure this works to your advantage: 

  • Make sure the lender reports payments to the major Credit Reporting Agencies. Some small “mom and pop” car dealers do not. Ask questions before you sign on the dotted line.   
  • Make sure you can afford your payments. Since the total amount you owe makes up about 30% of your credit score, it’s important to buy a car you can afford. Most reputable lenders will not let you borrow too much because they want you to be able to pay it back. Again, where you buy and finance matters.

4: Don’t Use Too Much Credit!

A good rule is not to use more than 30% of your available credit. So if you have a $1000 limit on a credit card, keep a maximum of $300 on it. Apply this rule to any credit cards or lines of credit you have. Even better, only use your credit card for amounts you can pay off in full monthly. [1]

5: Keep Credit Cards Open.

The length of your credit history is a good indicator of how your credit will perform. So even if you’re trying to resist the urge to use that store credit card, keeping it open without running a balance may improve your credit worthiness. Want to avoid temptation? Cut the cards up but keep the accounts open! If the credit card charges an annual fee, that is the exception to this rule. No sense paying a fee for a card you won’t be using. [1]

6: Use Cash Back Rewards to Pay Down Your Balance!

It might seem like the 2 or 3% cash back on your credit card is a nice reward to you, but if you use it to pay down your balance you’ll save interest on the outstanding amount and use less of your available credit! [2]

7: Get Higher Credit Limit on Cards You Have Before You Get A New One!

This is related to tip #3; it’s better to have more available credit on one card than to spread it around a bunch of accounts. And it’s easier to keep track of payments to fewer accounts and help you avoid missing a payment (See tip #1!) [1]

8: Track your credit and dispute any errors

At least once a year, review your credit reports from each of the three credit bureaus (Experian, Equifax, and TransUnion) for inaccuracies. File a dispute immediately if you find an error. You are entitled to obtain a free credit report once a year from each of the three bureaus. To obtain a free copy of your credit report, go to annualcreditreport.com

9: Every Payment Matters!

Credit bureaus are changing the things to compute your credit score. Now payments like rent, cell phone bills and other recurring payments can influence your score. Make sure all of those payments are made on time as well. And that brings us back to tip #1 again! Experian (one of the big three credit reporting agencies) even offers a service to help with this: https://www.experian.com/consumer-products/score-boost.html

 

Sources:

1: https://www.philadelphiafed.org/consumer-resources/publications/understanding-and-improving-your-credit-score
2: https://www.experian.com/blogs/ask-experian/how-do-cash-back-credit-cards-work/
3: https://www.thebalance.com/cant-make-minimum-credit-card-payment-961000
4: https://www.experian.com/blogs/ask-experian/does-buying-a-car-help-your-credit-positively-or-negatively/