Your credit score impacts your ability to be approved for a car loan, credit card and mortgage. And it’ll also affect your interest rates. A credit score is even used by landlords and insurance companies to determine your likelihood of making payments. Here are five simple steps for improving your score.
Your credit score is a critical factor in determining whether you can get a mortgage, buy that car you’ve always loved, or even qualify for certain types of insurance. And although building a strong credit score can take a long time, losing credit-worthiness only requires a few mistakes.
So, whether you’re establishing new credit or simply want to improve your credit rating, you’ll need to have the right strategy and stick to it.
Read on for the critical steps you should take to build a strong credit score:
- Have some credit
To begin establishing your credit history, apply for and open a few accounts, only as needed.1 Lenders like to see that you have credit and can manage your debt. But having too many lines of credit isn’t a good thing. A big piece of financial planning is making sure that your situation is sustainable, and that you haven’t taken on more debt than your budget can handle.
- Pay on time
Paying your bills on time is a necessity. Even if your balance is small, lenders want to see that you can make your expected payments. Paying your bills on time demonstrates a lower risk to the creditor and improves your credit score. 2
- Be aware of your credit utilization ratio
Your credit utilization ratio measures how much of your available credit you are using. To calculate it, divide the total of all of your credit card balances by your total approved credit limit. The lower the number, the better. High credit utilization tells creditors that you might be at risk of default.3
- Time is your friend
The length of time that you’ve had open lines of credit is important. So, keep in mind that closing older accounts can reduce the length of your active credit history and ultimately reduce your credit score.
- Be wary of hard inquiries
Your credit score is affected by the number of applications that pull your credit score. Too many of those so-called “hard inquiries” can negatively affect your score.4 Only apply for credit when the opportunity is appropriate and/or necessary.