5 Steps To Improve Your Credit Score
ProBlogger is currently organizing another group writing project and the theme this time around is a *Top 5* list.
With regard to personal finance and debt management, there are numerous topics that lend themselves well to a *Top 5* list. As an example, FreeMoneyFinance has written a post on the The Top Five Steps to Grow Your Net Worth that is well worth a read.
When I sat down to think about a topic for my own *Top 5* list, I immediately thought of how to improve your credit score. On the financial message boards that I frequent, this is often one of the most common questions asked and is of particular concern to people that have struggled with debt in the past and are trying to improve their situation.
Without further ado, I present to you my Top 5 Steps to Improve Your Credit Score:
- Pay at least the minimum due on time every month. The main reason that my wife and I maintained good credit scores while battling our way out of debt was because we always made at least the minimum payment on time every month. It wasn’t always easy and there were some very lean months right out of college but neither of us ever had a late payment. Even though you aren’t paying the debt off entirely, the lenders are really only concerned with whether or not you are going to pay them on time. Timely payments accounts for 35% of your FICO score so this is where you can get the most bang for your buck.
- Reduce your debt to available credit ratio. The next largest impact on your FICO score is the amount of money you owe on your credit cards relative to your total credit limit, also known as your debt to available credit ratio. The general rule of thumb is to shoot for a ratio no higher than 25% but obviously the lower the ratio the better. While the best scenario is to improve the ratio by reducing the outstanding debt, another option to boost the ratio is to try and increase your total credit limit. Be careful though as the additional credit could lead you to more debt if you are still struggling with the issues that resulted in the original debt.
- Do not cancel or close your cards as you pay them off. Often times people that have struggled with debt will want to close the credit card as soon as they eliminate the outstanding balance. However, this action can negatively impact your credit score in a number of ways. First, one aspect of your credit score is the length of your credit history and older cards are weighted more heavily. If you happen to close one of your older cards, you will be removing that lengthy credit history from your account. Another reason your score may decrease relates back to the debt to available credit ratio. When you close that account, you remove the entire available credit from your total but the outstanding debt does not decrease at all because the balance was zero. After working so hard to eliminate the debt, you don’t want to skew your ratio by closing your card. The last reason to keep paid off cards open is that they will often present attractive balance transfer offers that can help you expedite your debt repayment.
- Correct mistakes on your credit report. As I am sure most of you know, everyone is now entitled to one free credit report per 12 month period from each of the three main credit reporting agencies. When you order your credit report, review the information closely and dispute anything that is a blatant mistake. Be prepared as correcting mistakes can sometimes be a lengthy process but if your report contains errors it is imperative that you get them corrected.
- Be responsible with the number and type of credit accounts. As you work on improving your credit score, do not rush out and sign up for 10 new credit cards in an attempt to improve your debt to available credit score. The number of open accounts can work against you as lenders might view too much available credit as a potential risk. As a general rule of thumb, try to keep your accounts down to 3-4 credit cards including traditional cards and department store cards and an installment loan such as a student loan, car loan or mortgage. If you don’t meet this guideline, it is not a good idea to close accounts or add new accounts to fit the mold but that is a general example of a healthy mix of credit.
There you have my top 5 steps to improve your credit score. If you find that you can only follow one of these steps at the beginning, make it the step of paying your bills on time. This one step can help prevent you from falling deeper into debt with late payments and over the limit fees, which then result in increased rates and make the problem even worse.
This list is not an exhaustive list and I challenge you to find additional ways that you can improve your credit score. If you have a step that you think can benefit others, please take a moment to share it with everyone!