Want to know how to improve that credit score? These 5 credit score hacks will get you back on track! Forget your age — or that jersey number you used throughout Little League — the most important number in your life is your credit score.
That’s because your credit score is a sign of creditworthiness, and having a high score does far more than let you pay less interest on a new Honda Civic. A healthy credit score lets you get more bang out of your existing buck, and puts more cash flow in your pocket. (Instead of into the coffers of lenders.)
Too many consumers believe their credit score is like eye color; something that they can do little to change (aside from paying off debt). What they don’t realize is that there are many smart, if little known, strategies to improving your credit score — and help you hold on to more of what you make.
Here are five hacks to boosting your credit score, letting you borrow (and invest) money far cheaper and get you that much closer to financial independence.
How to Improve Credit Score
1. Make two credit card payments per month
Improving your credit score usually entails doing the simplest thing of all: paying off debts. If you delay in paying your credit card balance, your score can get damaged. Unfortunately, your score can also get damaged, even if you pay off your balance in full.
The trick to avoiding this? Pay your credit card bills twice a month.
A common misconception of credit card owners is when you pay your balance every month, your report shows a zero balance. This is not usually the case.
Your credit report reflects whatever balance you have on the day the credit card company reports to the credit bureau. You won’t know when this billing cycle happens. It could be before or after you made your payment. Even if you pay once a month, without delay, the report may still not show a zero balance.
Paying twice a month is better in a number of ways:
- The first payment, if done before the closing date, will reduce any outstanding balance, whenever your credit company reports to the credit bureau. It’s a good idea to pay half of your monthly bill during this time.
- The second payment, if done before the due date, makes sure you do not accrue any interest or fees due to late payment. You can pay the remaining balance of your bill at this time.
- Another thing you can do is to immediately pay off large purchases (e.g. airline tickets). This will also keep your credit score from taking a slight dip.
2. Increase Limits
— MagnifyMoney (@magnify_money) August 9, 2017
One of the important factors that affect your credit score is your credit utilization ratio — the ratio of existing debt to credit limit
Say you have a credit card with a $1,000 limit. Then you make a $500 purchase using your card. To assess your credit utilization ratio, you would divide your unpaid debt by your total credit limit. In this example, your credit utilization ratio would be 50 percent.
The higher the ratio, the lower your credit score. This is where increasing limits comes in handy.
Although it’s a debated topic, experts recommend your ideal utilization ratio be somewhere between 20 to 30 percent. This means the ideal usage amount for your $1,000 credit card would be up to $200 (20 percent of the limit). This shows creditors you have discipline with your purchasing and that you are not a risky borrower, as opposed to folks who max out their credit cards monthly.
But what if your ratio is far north of 20%? Simply ask for a limit increase to lower your utilization ratio.
If you’ve been spending, on average, $600 of your $1,000 credit card (60 percent of your limit), asking for a limit increase to $3,000 would then make your $600 monthly purchase well within the safe 20 percent zone.
Of course, you should have a history of paying your bills on time, before approaching your credit card company. If not, they might not be inclined to raise your limit, unless you hand over more cash to the credit company. But you’ll be shocked how powerful a simple phone call can be to your overall credit score, and wealth-building potential.
3. Pay down the card closest to the limit, first
It is not just your credit utilization ratio that affects your score. Your credit score is also be determined by the ratio you have for each card you own.
It’s common practice for consumers to pay off the card with the highest interest, first, to save money. However, prioritizing this way might actually be detrimental to your score, especially when you have other cards close to being maxed out.
Have maxed-out cards or cards close to their limits? Settle those first. Keeping cards maxed out negatively affects your score, given your high utilization ratio. Pay these off first, then, for the rest of your cards, pay their minimum balance.
Once you have settled the first maxed-out card, move on to the next with the lowest balance available, and so on.
Now this requires planning on your part. There are times, from a simple cash flow standpoint, when paying off high-interest cards, first, is the safe play. Just keep in mind credit bureaus look at your total credit card balance when calculating your credit score, not the interest rates of each card you have. Settle those with the highest balance first, and you’ll see a nice uptick in your overall score.
4. Strategically open accounts
It’s tempting to open a new credit card account or two when your credit limit is low, and the need for spending is high. The problem is, every time you apply for another account, creditors make inquiries on your credit score. And those multiple inquiries can add up to dent your score.
Now this doesn’t mean you should avoid credit inquiries entirely, they are a normal part of the process. However, these inquiries, especially when done successively in a short amount of time, can reduce your overall credit score, because they stay on your credit profile?
How long do they stay?
These inquires stay on your record for, in some cases, two years. The more inquiries you have, the more points that are docked from your credit score.
Be strategic when opening new accounts. If there are long-term benefits (e.g. would you be able to save money over time with purchases from this card?; would having more available credit give you a higher utilization ratio? ), then it might be worth it.
However, if you foresee yourself applying for a car or a home loan within the year of opening new accounts, make sure you do so within a 30-45 day period. Extra inquiries, on top of current ones, can dramatically decrease your credit score. (Which can make your interest rate climb and climb.)
5. Dispute old collections
Do you have collection accounts, less than $100, on your report that are nearing their seven-year mark? Could be a parking ticket you forgot to pay or a doctor’s fee that was not reimbursed by your insurance company, without your knowledge.
The good news is you can dispute these collections and have them removed from your profile and drastically boost your credit score.
Collection accounts stay in your credit reports for up to seven years. They can negatively affect your scores. However, the older they get, the less impact they have on your credit report.
Thanks to the new FICO Score 8 system,“ nuisance” collection accounts that amount to less than $100 can be removed from your report. This is perfect for things like library fines, parking tickets and other items nearing their seven-year mark. (Another good reason to run a credit check every 12 months.)
The Devil Is in the Details
Cleaning up your credit score doesn’t require massive action, such as paying off your debt in a single installment. It’s about taking small, but focused actions, that may seem insignificant by themselves, but when aggregated together present a picture of creditworthiness to the credit bureaus. Which, in turn, can help you borrow money cheaper, and leverage your funds in whatever wealth-building direction you desire.
Did these credit card hacks help? We want to know, share in the comments below!
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