Credit scores are meant to provide a fair representation of your creditworthiness at any given point in time. But as many of us know from experience, these scores can change suddenly based on a few changes to your credit report—and the effects on your finances can be significant.
Your credit score affects not only the interest rates you’re offered on debt but also your ability to get approved for a mortgage and other loans. It could also affect your ability to rent an apartment or even sign up for home utilities without a deposit or a cosigner.
A low credit score may be a source of stress, but you can raise this number by carefully managing your finances and taking advantage of the following five strategies.
1. Pay all of your bills on time.
Your bill payment history accounts for roughly one-third of your overall credit score. A few late payments can cause a sharp drop in your credit score, dragging down that number for as long as those late or missed payments are listed on your credit report—typically two years.
As simple as it seems, paying your bills on time is a core component of any strategy to boost your credit score. On-time payments will appear on your credit report, and consistent payments will strengthen the most significant category used in calculating this score.
2. Request copies of your credit reports, and dispute any errors.
If you aren’t sure why your credit score has dropped, it’s possible the credit bureau is calculating your score based on false information.
Errors can develop in several ways: A creditor might accidentally report the wrong information, such as a high balance or a missed payment that you actually made on time. In some cases, collection accounts may be wrongly attributed to you, or old accounts may be wrongly added into this calculation.
If you identify an error, you can file a dispute with the credit bureau to have the error removed. Make sure you pull reports from all three credit bureaus because the information reported may be different in each case.
3. Pay off all credit card balances or high-interest debt.
Debt utilization is another significant factor in any credit score calculation. If your credit card utilization increases significantly in a short span of time, that high utilization rate could trigger a swift drop in your credit score.
Experts recommend keeping overall credit card utilization to less than 30 percent—and less than 10 percent in an ideal scenario. As you pay off these balances and reduce the debt you carry at any given time, you should see improvements to your credit score.
4. Instead of swearing off credit, use credit responsibly.
Some consumers may think that the solution to a low credit score is to stop using credit altogether. Although it’s true that mismanaged credit—such as missed payments and high utilization rates—may contribute to lowering your credit score, appropriate credit use can help this number bounce back.
Don’t close accounts or swear off credit cards just because you’re hoping that doing so will raise your credit score. In fact, closing accounts can actually hurt your credit score by lowering the average age of your financial accounts, which is one type of criteria used to calculate your credit score.
Instead, focus on managing your use of credit, limiting charges to your accounts, making payments by the due date, and paying off balances in full to avoid paying interest.
5. Make strategic use of credit limit increase requests.
An increased credit limit can give you more financial flexibility, especially when it comes to your debt utilization rate. Limit increases are also a sign that your creditors trust you with larger amounts of available credit.
As you improve your score and make consistent payments on your accounts, you might request credit limit increases from your creditors. Before making this request, find out if the creditor uses a “hard inquiry” or a “soft inquiry” when processing limit increase requests.
Soft inquiries can be processed without anything being listed on your credit report, but hard inquiries will live on your credit report for two years—and the more inquiries you have, the lower your credit score will be. Take advantage of limit increases that use soft inquiries, but when hard inquiries are involved, make these requests sparingly.
Give credit bureaus the financial performance they’re looking for.
Credit bureaus might be secretive about the exact calculations they use when generating your credit score, but they aren’t shy about the broad variables they consider in these calculations. This is great for consumers because it offers clear guidance on how you can orient your financial goals toward changes that make the biggest impact on your credit score.
Are you doing everything you can to maximize the value of your credit score? Discover more tips to build better credit—and reduce your debt—by downloading The Definitive Guide to Paying off Credit Card Debt.