Improving your credit score can be one of the best things you can do for your finances. A high credit score can lead to lower interest rates on home loans and better credit card rewards.
Getting an excellent credit score isn’t too difficult if you have good credit habits. Here are four easy ways to improve your credit score:
1. Fix errors. This may be the easiest fix, and starts when you get a copy of your credit report for free from annualcreditreport.com. An estimated 21 percent of consumers have errors on their credit reports, according to a 2013 study by the Federal Trade Commission.
Federal law gives you the right to check your credit report for free, and allows you to dispute errors that you find on the report with the credit reporting agencies.
2. Pay your bills on time. Not only will you avoid late fees, but paying your bills on time will show creditors that you’re a low risk. Even if you only miss paying a bill by a single day, it can hurt your credit score.
Payment history makes up 35 percent of FICO scores, or the Fair Isaac Corporation, which rates excellent scores at between 781 to 850. That’s the credit score you should be shooting for.
3. No high balances. If you can’t afford to pay off a credit card bill in full each month, you should aim to keep the balance as low as possible.
Up to 30 percent of a credit score is based on the amounts owed, also called “credit utilization.” It’s the ratio of outstanding debt to available credit. A ratio of 10 percent is preferred for a high credit score. For example, if you have a credit limit of $10,000 and you’re using $5,000 of it, then you credit utilization ratio is 50 percent, which is way too high to be considered good credit use. The lower the percentage, the better.
4. Raise your credit limits. If you can’t pay off your credit cards completely each month or have a high credit utilization number, then one way to improve your credit score is to increase the credit limits on your credit cards.
The increased credit will cause your utilization ratio to fall, but only if you don’t use it to take on more credit card debt.
By implementing these tips, it may only be a few months before your credit score improves and you can really get what you want out of it — a better interest rate on a loan.