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So what if the first of the year has already come and gone? It’s never too late to establish yearly money goals for yourself. If your credit score needs work (or if you’ve been denied credit), there’s no time like the present to raise your personal FICO score. (See also: 10 Surprising Ways to Negatively Affect Your Credit Score)
Obviously, you’re not going to improve a low score in only a few days, but credit repair is easier than you might think. But, if you’re tired of getting turned down for credit and you’re ready to improve your score and qualify for mortgages, auto loans, and better interest rates, here are seven easy ways to get back in the game this year.
1. Reduce How Much You Use Credit
With credit card ownership comes the temptation to use it more than you should. Personally, I know people use credit cards for every single purchase and carry high balances. And I bite my tongue every time they boo-hoo about how they’re drowning in debt. Thus, if want to raise your credit score this year (and avoid me wagging my judgmental finger at you), you need to reduce how much you use credit cards in order to lower your credit utilization ratio.
This all-important ratio is calculated as your total credit card balances divided by your total credit card limits. If you have one credit card with a $1,000 credit limit and this card has a $900 balance, your credit utilization ratio is 90%. This is a high ratio and it’ll drive down your credit score — generally, credit scoring companies prefer a ratio of well under 50% (and in some cases, under 30%). Your credit utilization ratio makes up 30% of your credit score, so pay down your balances to improve your score quickly.
People with the highest credit scores have a utilization ratio of 1% to 10%, according to research from Credit Karma. Remember, credit card utilization takes into account your total credit card balances. So, you need to add up all your credit card balances and divide the total by all your credit card limits to come up with your overall ratio.
2. Increase Your Available Credit
If you have a high credit utilization ratio and you’re not in a position to pay down balance, there’s another trick to give your credit score a boost: Basically, you want to widen the gap between your credit limits and what you owe.
So, if you have a $1,000 credit limit and you owe $900 on a credit card, call your credit card company and ask for a credit line increase. Although you don’t need perfect credit for an increase, this only works if your score is high enough to qualify for more credit, and the requirements vary by card issuer. Still, there’s no harm in trying. Let’s say the credit card company raises your credit limit to $2,000 — this decreases your credit utilization ratio from 90% to 45%, which is a definite improvement. A credit limit increase isn’t an invitation to shop, though; get that out of your head right now. The goal is to increase your credit score, not get into more debt. (See also: Best Credit Cards for Bad Credit Scores)
3. Start Paying Your Bills on Time
This might seem like a no-brainer, but it has to be said. Your payment history makes up 35% of your credit score, according to myFICO. To raise your credit score this year, make sure you pay every single bill on time every single month. This is not an easy feat, which means that you have to be extra diligent with your cash flow. A 30-day late payment knocks points off your credit score, and if you’re late several times a year, your credit score may tank, and creditors won’t extend financing. Set-up e-mail alerts to remind yourself of due dates, and pay bills online to ensure they reach creditors on time.
4. Pay Off a Loan
Paying off a personal loan, an auto loan, or a student loan also gives your credit score a boost. This is because creditors report the debt paid in full as agreed, thus giving you brownie points for good credit management. If you apply for new loans, select the lowest loan term you can afford to get rid of the debt faster.
5. Diversify Your Credit
You might be okay and comfortable with just a credit card, but having only one type of credit account isn’t enough to build a strong credit history. Diversification makes up 10% of your credit score. You need a good mix of credit, such as one credit card and maybe a mortgage, car note, or student loan. Of course, if you’re able to pay in cash for these items, there’s no need to take on any extra debt.
6. Don’t Open Too Many New Accounts
Opening too many accounts in a short span of time has a negative impact on your credit score — and provides that much more unnecessary temptation to drag you further into debt. Each credit inquiry reduces your credit score by a small amount. Also, if you submit a bunch of applications at once, creditors get suspicious and assume you’re desperate for credit, and they might not approve your application.
7. Check Your Credit
Don’t let credit report errors or identity theft ruin your credit score. Order your free credit reports (you get one per year from each of the three leading credit bureaus) from AnnualCreditReport.com and examine the contents for mistakes. Dispute any negative items reported in error, such as judgments, collection accounts, or late payments. The bureaus and creditors will update your report with accurate information, which can increase your score.
Have you improved your credit score? What steps did you follow?