Credit Sesame’s handy guide to how to increase your credit score can get you on track for a strong credit score that opens doors to a range of opportunities. From getting approved for financing to qualifying for lower interest rates, improving your credit score can help you achieve your financial goals without having to pay too much in interest for loans or credit cards.
Even if your credit score isn’t where you’d like it to be, now, there are steps you can take to improve it. Some steps take time to make a noticeable difference, while others affect your credit score more quickly.
Factors that affect your credit score
Your credit score is based on your financial data that’s tracked by credit bureaus in your credit report. Lenders and creditors use different algorithms to analyze the data and assign a credit score to you. When considering how to increase your credit score, bear in mind the five primary factors that influence your credit score.
- Payment history. Your payment history includes the timeliness of your payments on credit accounts, such as credit cards, student loans, auto loans, and mortgages. Payments past 30 days late register on your credit report and lower your score.
- Amounts owed. The credit bureaus also track how much debt you carry compared to the amount of credit available to you. Maxing out your credit card can hurt your score more if your balance is greater than 30% of your credit line.
- Length of credit history. The longer your credit history, the better your score will be, since it gives more data for creditors to determine what kind of borrower you might be. Credit algorithms consider the ages of your oldest and newest accounts, as well as the overall average age of all your accounts.
- Credit mix. Not all types of credit are the same and credit scores are impacted by the different types of debt you hold. Revolving credit has no final payoff date and continues to accumulate interest, so it lowers your credit score. Installment loans, like a car payment, have a fixed amount of interest and a set repayment term, so it’s viewed more favorably. Having a diverse mix is better for your credit score.
- Recent credit. The final factor impacting your credit score is new credit. Opening a number of new accounts in a short period of time is harmful, as is applying for a number of accounts in a short period of time, which causes hard inquiries on your credit report. These instances usually result in minor dings on your score, but they can quickly add up.
How to increase your credit score
Learning how to increase your credit score makes a world of difference in how easily you qualify for financing in the future — and at what cost.
Check credit reports for accuracy
Start by getting free copies of your credit reports from AnnualCreditReport.com. There are three you’ll need to review, one from each major credit bureau: Experian, Equifax, and TransUnion. Once you have your reports, check each one for accuracy. Make sure there are no fraudulent accounts on there and that your current balances are correct.
This is also an easy way to figure out all of your current credit lines, especially if you have multiple credit cards. Tuck this information away for future steps when you’re ready to prioritize paying off debt.
Sign up for free credit monitoring
Free credit monitoring helps you protect your credit score and can give you insights on what needs to be improved. Identity theft is increasingly common these days, especially with corporate data breaches potentially putting your personal and financial information at risk.
Credit monitoring alerts you anytime suspicious activity occurs in your name, including new accounts being opened. This protects you from having your credit score damaged because of someone else impersonating you.
This service also lets you know what’s helping your score and what’s hurting it. These insights are useful as you determine the steps that will have the greatest impact on improving your credit score.
Prioritize paying off debt
Once you’ve done your research on your current credit situation, it’s time to prioritize paying down debt. This has a great impact on your credit score because it lowers your amount owed and balances your credit mix.
Prioritize the type of debt you pay off by focusing extra payments on revolving credit with high balances. While still making the minimum payments on all of your credit accounts, any additional money you have to put towards your debt should go towards credit cards that are maxed out or close to it.
Set up autopay
Late payments can quickly hurt your credit score and they stay on your credit report for seven years. Avoid that long-term damage by enrolling your credit accounts in autopay. That way the money is automatically deducted from your bank account in time for the due date. If you don’t have a bank account, this is just one of many good reasons to open an account.
It also helps you prioritize your credit card and loan payments by motivating you to leave enough money in your bank account to cover those bills. Once they’re paid, you can use your leftover cash for savings and discretionary spending.
Pay credit cards twice per month
Making two payments a month helps your credit score in a couple of ways. First, you can time the payments to go with your paychecks. That makes it easier to budget and can help you stay on top of those bills.
Another reason is because your credit score is constantly fluctuating. Even if you pay your credit card in full each month, that balance could still affect your score if a lender or potential employer pulls your score before you’ve made a payment. By paying twice a month, you’re keeping your balance lower throughout the month, rather than just at the end of your billing cycle.
Negotiate interest rates
You may be able to negotiate a lower interest rate with your credit card company, especially if you’re a long-time customer and have a solid payment history. This lowers the amount you’ll owe over time, since less interest is added to your balance each month. Do, however, clarify if they’ll need to perform a hard inquiry in order to approve a lower rate. That may temporarily lower your score by a few points.
Ask for credit limit increases
Another way to improve your credit score is to ask your credit card company for a larger credit line. The key to success, however, is to not actually charge up the account. Instead, you’ll lower your credit utilization because your existing balance will be a smaller percentage of your available credit. Here’s an example:
Say you have a $6,000 balance on a credit card with a $10,000 limit. Your credit utilization ratio is 60%. But if you get that credit line bumped up to $15,000, your credit utilization lowers to just 40%. Just like negotiating interest rates, this tactic works best when you’ve regularly made on-time payments in the past.
What to avoid when deciding how to increase your credit score
Avoid applying for too much new credit when you’re working on your credit score. Each hard inquiry stays on your credit report for two years and drops your score by a few points for one year. Plus, several new accounts (especially credit cards) can raise a red flag to lenders when applying for installment loans, such as mortgages or auto loans.
How to increase your credit score with Sesame Cash’s Credit Builder
The Sesame Cash Credit Builder is another tool you can use to improve your credit score. Use it like a debit card while Credit Sesame reports your payments to the credit bureaus like a line of credit. Plus, there’s no hard credit check so you don’t have to worry about a short-term drop in your score.
Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.