Having financial problems is common. The average American has personal debt of $90,406, and millions struggle with their credit score. So, if your credit score isn’t where you’d like it to be, you’re certainly not alone.
How do you improve your credit score? The best way is to start by understanding where your credit score comes from. When you understand the elements, you can improve your score more effectively.
Then, you need some strategies to boost your credit score now and keep it high over time. Let’s dive into some tips you can use today.
Understand the Elements of a Credit Score
The first step to improving your score is to understand it. A credit score has several elements, and each one contributes to the overall score.
The most important factor is your payment history. This accounts for 35% of your credit score. If you have late payments, missed payments, or delinquent accounts, your credit score is likely to struggle. The best way to improve your credit is to pay your bills on time.
The second portion of your credit score is your credit usage percent. For instance, suppose you have two credit cards with a credit limit of $1,000 each. If you have 800 charged on each one, you’re using $1600 out of $2000 available credit, or 80%. The higher your credit usage, the lower your credit score. This factor represents 30% of your credit score.
How long your credit history is accounts for 15% of your score. The longer your credit history, the better. If you have a credit card you’ve had for a long time, consider keeping it open once you pay it off. That way, you won’t shorten your credit history.
Your credit mix represents 10% of your score. This is about what kinds of credit you have. The more diversity, the better. For instance, a credit card and a car payment are different types of credit.
Finally, 10% of your score is based on recent applications. The more recent credit checks you have on your account, the lower your score would be.
Check Your Credit Report
Once you understand your credit score, it’s time to see where you stand. You can order your credit report for free from a credit bureau once every three years. Since there are three credit bureaus, you can get a free credit report each year.
Your report may not show your exact FICO score, but it will show you all the factors that impact credit. You’ll want to look for errors and dispute them right away. Getting an incorrect delinquency removed or correcting other mistakes can raise your credit immediately.
Keeping an eye on your credit report can also help you catch fraudulent activity quickly, which can save you time and money if your identity has been compromised.
Create a Repayment Plan
Next, take a look at how much credit you’re using and how much is available to you. If your credit score is low, you probably owe quite a bit compared to your limits. You’ll need to create a plan to tackle your debt.
You can improve your payment history by paying on time. One way to avoid being late is to make half of your payments every two weeks instead of the whole thing once a month. This can help you pay less interest over time as well.
When you pay every two weeks, you’ll make 26 half-payments, which is 13 full payments. You probably won’t even notice the difference, but you’ll make a full extra payment every year!
Another great strategy is called a snowball plan. This is where you pay minimums on your debt except for the smallest balance. Put all of your extra money toward that small debt. Once it’s paid off, put that payment amount toward your second-smallest debt, along with the minimum you were already paying. Keep working your way up your debt ladder.
This method lets you get rid of small debts and create a feeling of winning while also building momentum toward paying off all your debts.
Don’t Close Unused Credit Cards
As you pay off your credit card debt, you may want to close your accounts so that you reduce the temptation to use them. Unfortunately, this hurts your credit score by keeping your debt usage percentage high.
Instead, pay off the cards and remove them from your wallet. Place them in a safe spot in your home or a safety deposit box. That way, you won’t have access to use the card, but the available balance will help your credit score.
As you improve your credit score, you’ll have more flexibility in many areas of your life. You’ll get better rates on loans and have an easier time getting approved for everything from insurance to a lease. It’s worth it to put these strategies into action!