How To Improve Your Credit Score

Credit scores measure your credit worthiness, meaning how reliable you are as a borrower.  Credit scores are simply a measure of how good your are at managing debt.

This is an unfortunate system because in essence you have to get into debt to have a good credit score, but this is the reality we live in and we have to deal with the cards that we have been dealt.

Having a good credit score is essential in order to be able to get a home loan or a car loan, and also to be able to get the lowest possible interest rates.

If you have a low credit score, here are some ways you can improve your credit score.

Ways to Improve Your Credit Score

The first thing you should do is get a copy of your credit report.  You can get a free copy of your report once a year at AnnualCreditReport.com. You first need to know where you stand before you can take steps to improve your score.

Dispute errors – Check your credit report for errors and dispute them if you find any.  Errors in credit reports are not unusual, but the credit bureaus won’t know to fix the errors unless you ask them to investigate.

Also, try to remove old negative items from your report.  If you have an old account that went to collections but that you already paid, try to get that account removed or be listed as “paid as agreed.”  However, don’t remove old good accounts from your report.  Good accounts will help your score, so keep them there as long as possible.

Pay bills on time – Late payments have a high negative impact on your credit score.  Make sure you pay all your bills on-time and avoid late payments.  A good way to do this is to gather all your bills and write down the due dates.

If the due dates don’t work with your schedule, give the companies a call or go online and change the due date for a date that works for you.  This way you can pay all your bills at the same time and avoid having a bill fall through the cracks.

Pay off credit cards – This should go without saying, the less debt you have, the better your credit score.  If you have a lot of different credit cards and they all have a balance, it might hurt your credit score.  Instead, pay off the cards with the small balances and show zero balance on as many cards as possible.

Keep credit card balances low – Paying off your credit cards should be priority, but if you use your credit cards for the rewards and to keep your credit history healthy, keeping a low balance will help your score. Credit Card Utilization has a high negative impact on your credit score.  Most experts recommend keeping your credit card utilization below 30%, but try to keep them below 20% if you can.  The lower the better.

Increase your credit limit – Asking for a credit limit increase will help your credit card utilization ratio.  I’m a little hesitant recommending this because it should only be done by those who have a hold on their expenses and keep their balances low.  If you are maxing out your credit cards every month, increasing your limit will probably only help you spend more until you max out the new credit limit.

Maintain a Good Credit Score

Like I said, it is unfair that we have to keep going into debt – even if it’s momentarily – to maintain a good credit score, but that’s just the way it is nowadays.  Taking the above steps will not only help you improve your credit score, but it will also help you maintain a good credit standing.

Pay off your credit cards every month and keep the balances low during the month because you don’t know when the balances get reported to the credit bureaus.  There are also measures being taken that will likely improve your credit score soon, but until those measures are put into place your best bet is to keep paying off your credit cards.

Maintaining a good credit score will not only help you get a loan when you need it, but it will also save you hundreds of dollars on interest by getting a lower interest rate.

Do you have other recommendations to improve credit score?

[Photo Credit: Lending Memo]