9 Things You Can Do to Work on Your Credit Score

Understanding and managing your credit score is crucial, as it plays a significant role in determining your financial opportunities. Many companies, including those in the automotive industry like used car dealerships, utilize your credit score to decide whether you qualify for approval, the cost of your insurance, or the interest rate you receive. Individuals with high credit scores often enjoy lower interest rates and more favorable terms, such as reduced down payments, compared to those with lower scores. Conversely, a poor credit score diminishes your chances of approval.

The Federal Reserve Bank of Philadelphia explains that credit scores are numerical representations falling within a range, typically from 350 to 850. However, some credit scoring companies employ different ranges, such as 501 to 990. It’s essential to note that scores from different ranges cannot be directly compared. For instance, a credit score of 720 within the 350 to 850 range is not equivalent to a score of 720 using the 501 to 990 range.

To improve your credit score, consider the following tips, many of which are recommended by the Federal Reserve Bank of Philadelphia:

1. Starting Now: Never Miss a Payment!

Missing or late payments may have already affected your credit score. Commit to not missing any future payments, as this is a crucial step in enhancing your credit. Utilize tools like automatic or online payments to avoid oversights.

2. Communication is Key: Ask for an Extension if Necessary!

If you anticipate difficulty making a payment, contact your lender in advance to discuss possible solutions. Proactive communication can help you find alternatives and avoid negative consequences.

3. Strategically Finance Large Purchases

Financing and paying off significant purchases like a house or car from a used car dealership can swiftly improve your credit score. Ensure that the lender reports payments to major Credit Reporting Agencies and that you can comfortably afford the payments.

4. Limit your credit usage!

A practical guideline is to avoid using more than 30% of your available credit. For instance, if your credit card has a $1,000 limit, aim to maintain a maximum balance of $300. This principle should be applied consistently across all your credit cards or lines of credit. Even better, restrict credit card usage to amounts you can completely pay off each month for optimal financial management. [1]

5. Maintain Open Credit Cards

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 creditworthiness. 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.

6. Utilize Cashback Rewards Strategically

Use cashback rewards to pay down your credit card balance, saving on interest and utilizing less of your available credit.

7. Increase Your Credit Limits Before Getting New Credit

Increasing the credit limit on existing cards is often preferable to getting new ones. Managing fewer accounts makes it easier to keep track of payments.

8. Regularly Check and Dispute Errors on Your Credit Report

Review your credit reports annually for inaccuracies and dispute any errors immediately. You are entitled to a free credit report each year from each of the three major credit bureaus. To obtain a free copy of your credit report, go to annualcreditreport.com

9. Every Payment Counts!

Credit bureaus are evolving their credit score calculation methods. Now, various payments, such as rent, cell phone bills, and other recurring expenses, play a role in influencing your credit score. It’s essential to ensure timely payments for all these obligations. This emphasizes the significance of Tip #1 once more! Notably, Experian, one of the major credit reporting agencies, provides a service to assist with managing and optimizing these aspects of your credit history.

Additionally, when considering financing options for significant purchases like a car, whether from a new or used car dealership, ensure that the terms align with your financial capabilities and goals. If you’re working with a used car dealership, inquire about their financing options and credit reporting practices to make informed decisions that contribute positively to your credit history.

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/