How to Increase Credit Score

Share In order to increase credit score to its maximum potential, it is first of all important to understand why good credit is important, what a good score is, and how your credit score is determined.

Why It's Important to Increase Your Credit Score

Building and maintaining a good credit score is vital to most of us in terms of reaching our goals and dreams.

No matter how frugally you live and how much you save, one day you will likely have to borrow money in order to purchase a big-ticket item such as a car or home.

In terms of our current economy, a good credit score is even more important these days, as many lenders are being extra-conservative about who they loan their money to.

Even if you do manage to get a loan with a less-than-perfect score, your APR will be much higher than it could be, which translates to higher monthly payments and, ultimately, an item (whether it is a home, a car, or a big-screen tv) that costs you several times what you originally paid.

Your credit score not only affects how much you pay for items that you purchase with loans, but it will also influence many future employers when deciding whether to hire you.

Nowadays, a credit report and credit score check goes hand-in-hand with the résumé, interview, and background check.

If you have a lot of late payments, delinquencies, or even too much debt, these things can make an employer decide that you are a bad risk for the company, and another applicant with a better score who is like you in every other respect may be hired instead.

A third, often overlooked, reason for increase credit score is auto insurance. Just like potential employers, auto insurance companies are betting that a correlation exists between your credit history and how responsible a driver you are.

The lower your credit score, the higher your auto insurance.

How Credit Score is Calculated

So, now that we know why it is important to increase credit score, you may want to know what a good score is. Scoring starts at 300 and goes up to 850.

The cutoff for the best rate with most lenders usually requires a score of at least 680 (many argue 700). In the United States, the average credit score is 678, which tells us that we could be doing things a bit differently.

Find out how to get free credit reports here

An individual’s credit score is based on many factors, including payment history, current debt, length of established credit, inquiries, and types of credit used. Payment history accounts for 35% of your score.

This is because a potential lender needs to know whether you are reliable in terms of paying them back. If in the past you have missed or become delinquent on payments, your score will be lower to reflect this.

Your current debt level accounts for 30% of your score. The closer you are to meeting or exceeding the total credit available to you (in the form of credit lines and beginning mortgage or loan amounts), the worse your credit score will be. Naturally, the more imperative it is to increase credit score.

The length of your credit history accounts for 15% of your score. The longer you have had accounts opened, the higher your score will be.

On the other hand, applying for new credit (especially if you open many new accounts at one time) shows up on your report as inquiries can affect your score adversely, and accounts for 10% of your score.

Lastly, types of credit used accounts for 10% of your score.

If you have or have had a variety of different types of credit, such as credit cards, auto loans, a mortgage, and retail accounts, this is seen as an indicator that you are able to manage your money successfully, and has a positive impact on your credit score.

Ways to Increase Credit Score

Now that you know that to increase credit score is very crucial, why good credit is important, what a good score is, and the factors that determine your score, let’s discuss ways to increase credit score itself.

Obviously, since your payment history comprises the largest chunk of your score, it is important to pay your bills on time, month in and month out. If you have not been doing so, begin now. Pay at least the minimum payment on each of your loans each month.

The next largest factor in determining your score is the amount of debt you carry, so the second most effective way to increase credit score is to begin to reduce your debt. Pick a loan, and begin to make extra payments on it until it is paid off.

Then pick another loan, and do the same. You need to lower your debt until it is less than half of your total available credit. If you have credit card debt, try to get it down to a quarter of your maximum limits. Get your debt under control, so that it no longer controls you.

Other things that affect your creditworthiness are mistakes or errors within your credit report. These mistakes could have a direct negative impact on your credit, so it is important for you to obtain a copy of your report from one of the three major bureaus a few times a year.

United States law dictates that you have the right to view your credit report from TransUnion, Experian, and Equifax, the three major credit reporting agencies, once a year. Every four months, go to AnnualCreditReport.com and check your report with one of the credit agencies.

Doing this has the added benefit of helping you identify and put a stop to identity theft before it destroys your life and your credit.

In the event that you find a mistake within your report, contact the creditor and the agency to correct the mistake. By law, the creditor has to correct the report if a mistake has been made.

One of the worst things you can do in an attempt to increase credit score is obviously by declaring bankruptcy, which will lower your score up to 200 points.

Also at this point, you may consider on hiring a debt settlement company to help you get out of debt. Signing up with debt settlement companies has a risk on lowering your credit score if you’re not careful.

Another option is to enroll in credit report repair services that are available in your area.

You can always take matters into your own hands and do the work of repairing your credit yourself. Sit down with all your bills in front of you, write down your debt, and begin to call companies if you’ve already missed a few payments.

Most of the time, they will work with you up to a point because you have something they want--their money! Just remember to be courteous and concise.

Remember to get all agreements in writing, especially that your report will read “Paid as Agreed” once your debt is paid.

When it comes to increase credit score, the best tool is always education. Remember that increasing your credit score takes time, commitment, and work, but it can easily be accomplished.

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