9 Ways to Improve Your Credit
Your credit score is one of the most important pieces of information about you. This is especially true if you’re dreaming of changing your living status from renter to homeowner. Your credit score can make all the difference in whether your dream comes true. Even an FHA mortgage, designed for first-time home buyers or people with less than stellar credit, requires a minimum credit score of 500 to qualify. If yours is currently lurking somewhere around or below that, here are nine ways to improve it.
1. Pay Your Bills on Time
Nothing trashes your credit score more than late payments. Both FICO and VantageScore use your history of on-time payments as their largest scoring factor. Set up due-date alerts for all your bills, especially your credit card payments, so you’ll automatically get reminders of when each bill is due. Better yet, set up autopay.
2. Keep Your Utilization Ratio Low
The second most important factor is your utilization ratio. This is your current card balance in comparison to you total credit limit. For instance, if you have a credit card with a $10,000 limit, but a balance of only $2,000, your utilization ratio for that card is 2:10, or 20%. Experts recommend that you keep your overall utilization ratio at no more than 30%, and ratios of 10% or below receive the highest credit scores.
3. Use the Snowball or Avalanche Method
Paying off your credit card balances is another good way to raise your credit score. You can use one of two strategies to do this: snowball or avalanche. The snowball method consists of zeroing in on your cards with the lowest balances and paying these cards off first. The avalanche method consists of zeroing in on your cards with the highest interest rates and paying these cards off first. Either way, be sure to keep your paid-off credit card accounts open. Zero-balance cards substantially lower your credit utilization ratio and therefore raise your credit score.
4. Become an Authorized User on Someone Else's Card
FICO, the credit scoring system used by most lenders, weights the length of your credit history as 15% of its score, meaning the older your credit accounts, the higher your credit score. This puts you at a disadvantage if you’ve had credit for only a few years.
One way to “pad” your credit history is to become an authorized user of someone else’s credit card. Say, for instance, that your mother has had a certain credit card for decades and has always used it wisely and made her payments on time. If she designates you as an authorized user of this card, her credit history for it shows up on your credit report.
Keep in mind that just because you’re now an authorized user for this card, you don’t need to actually use it. In fact, not only does your mom not need to give it to you, but she doesn’t even have to tell you its number.
5. Apply Only for the Credit You Need When You Need It
Every time you apply for credit of any type, whether a new credit card, an auto loan, or something else, it generates a hard inquiry on your credit report that immediately lowers your score. This, in turn, can stay on your report for the next year, thereby lowering your credit score for that length of time. Worse yet, a string of hard inquiries in a short period of time signals that you could be taking on too much debt. Even if you receive a “pre-qualified” credit card offer in the mail, applying for it can be a bad idea.
When you really do need new credit, your wisest course of action is to check your credit score yourself to see if you qualify for it. Checking your score yourself results in a soft inquiry rather than a hard one and doesn’t affect your score one way or the other.
6. Get and Analyze Your Credit Reports
You are entitled to get a free credit report from each of the three major credit bureaus (Experian, Equifax and TransUnion) each year. Your best interests dictate that you get all three and then analyze them carefully. Credit reporting mistakes do occur, and if you find one or more of them, dispute them. Look for such things as:
Incorrect late payments
Someone else’s credit activity mixed in with yours
Out-of-date information that should have been deleted, such as late payments or repossessions that can only remain on your credit report for seven years
Incorrect outstanding balances that you’ve paid off
When you dispute something on your credit report, the reporting company must contact the company from which it got the disputed information. Once it verifies that your claim has merit, it must delete the incorrect information, thereby raising your credit score.
7. Diversify Your Credit Types
While a good credit mix won’t necessarily affect your credit score per se, potential lenders nevertheless like to see that you have more than one type of credit. For instance, if you only have revolving accounts like credit cards now, getting an installment loan for a new or new-to-you car is a good idea. On the other hand, getting credit when you don’t really need it is never a good idea.
8. Ask For Higher Credit Card Limits
Ask your credit card companies if they will grant you a higher credit limit, preferably without generating a hard inquiry. If they agree, but you don’t increase the balance on those cards, your credit score goes up as soon as your new credit utilization rate hits your credit report.
9. Get Advice From Trusted Experts
If your main purpose for improving your credit score is to qualify for an FHA loan to buy a home, contact FHA Insider. Our name says it all. Our team of FHA mortgage professionals knows all the ins and outs of qualifying for one of these loans, including the best ways to quickly raise your all-important credit score.
