Whether you’re trying to get lower interest rates, better deals on loans, or headache-free approvals for home rentals, having a good credit score will help drastically improve your qualifying odds.
Let’s take a look a little more deeply at credit scores. Then, we’ll explore how you can improve your credit score in five simple steps. You’ll be on your way to the 700s in no time!
What is a good credit score and why do you need one?
There are a few things you should know about credit scores before we dive into the steps to improve yours.
Your credit score is a number that ranges from 300 to 850 and is given to you by a credit bureau. This number is based on your credit history, which is a record of how much debt you have and whether or not you’ve made payments on time.
Here’s how Experian, one of the three major credit bureaus, scores your credit:
- 781-850: Excellent
- 661-780: Good
- 601-660: Fair
- 500-600: Poor
- 300-499: Bad
So if your credit score is below the 660s, you should consider taking steps to improve it. A good credit score means you’re a low-risk borrower, which can lead to lower interest rates and better deals on loans. A bad credit score, on the other hand, could lead to higher interest rates and less favorable loan terms.
What factors affect your credit score?
If you hope to improve your credit score, you’ll need to know what all goes into how it’s calculated. Here are the five main factors according to Experian, in order of most important to least important.
Your payment history is the most important factor in your credit score. This factor is self-explanatory and includes whether you’ve made previous payments on time and missed any payments.
Amount of debt
Debt is another significant factor when it comes to formulating your score. The debt you carry is often expressed in terms of your credit usage, which refers to the debt ratio to available credit.
For example, if you owe $2,000 on a card with a $10,000 credit limit, your credit usage would be 20%. However, if your credit limit is only $2,000 and you owe the same amount, your credit usage would be 100%.
So even if you have a low credit limit, maxing out your card and carrying a large balance from month to month can negatively impact your credit score. Try to keep your credit usage as low as possible by paying off as much as you can each month.
Length of credit history
Believe it or not, your credit score is also impacted by the passage of time. Keeping accounts open and maintaining on-time payments over the course years does wonders for your credit score.
Conversely, young adults or people without any credit history may be penalized in this category (but don’t worry—you can build up your credit history length with time and patience!)
Diversity in terms of your credit accounts is another factor in how your credit score is determined. Having different types of debt, such as student loans, car loans, or credit cards, can be a good thing if you keep up with the monthly payments.
New credit is the fifth most important factor in your credit score and includes any new credit lines you’ve opened and how long it’s been since you opened them. Be sure to maintain on-time payments for new lines of credit and be mindful about limiting the number of new accounts you open in a short period.
Improve your credit score in 5 easy steps
Now that you understand what goes into your credit score let’s look at the five steps you can take to improve it.
1. Check your credit report for errors
The first step to improving your credit score is to check your credit report for errors. You’re entitled to one free copy of your credit report from each of the three major credit bureaus every year: Experian, Equifax, and TransUnion.
Once you have your report, review it carefully and look for any mistakes. If you find an error, dispute it with the credit bureau.
2. Make your payments on time
The second step to improving your credit score is making timely payments. This includes your mortgage, car loan, student loans, and credit card bills.
One of the best ways to ensure you always pay on time is to set up automatic payments. That way, you’ll never have to worry about forgetting a payment or being late.
If you have missed any payments in the past, now is the time to catch up. The sooner you show that you’re capable of making timely payments, the better off you’ll be.
3. Lower your credit usage
Generally, it’s best to keep your credit usage below 30%. However, you may want to lower your credit usage even further if you’re trying to improve your credit score. There are a few different ways to do this.
One option is to simply pay down your balances, so you’re using less of your available credit. Another option is to ask for a higher credit limit from your lender. This will immediately lower your credit usage and can also have a positive impact on your score over time.
Whatever approach you take, reducing your credit usage is essential in improving your overall credit health.
4. Use a secured credit card
If you need to improve your credit score but have a bad history with credit cards, it might be worth using a secured credit card. A secured credit card requires you to put down a security deposit.
The deposit acts as collateral if you default on your payments and limits your spending to the money you have on deposit.
A secured credit card can help improve your credit score because it shows you can use credit responsibly. Make sure to make all your payments on time and keep your balance low.
5. Limit the number of hard inquiries
A hard inquiry occurs when a lender checks your credit report in connection with an application for a loan or credit card. Hard inquiries can stay on your report for up to two years, and too many of them can lead to a drop in your score.
If you’re considering taking out a loan or opening a new line of credit, try not to do so within a short period, so the inquiries don’t impact your score as much.
By taking these steps, you can help improve your credit score and make it more likely that you’ll be approved for the credit you need.
Final thoughts on improving your credit acore
In this day and age, a good credit score is critical. While it might be true that paying cash is the safest way to avoid debt, using credit cards responsibly and making loan payments on time is important for showing your trustworthiness to potential lenders. Julep can help keep track of your finances so you can pay down debt and improve your credit score.
Julep is not a financial institution, financial advisor, or credit repair company, and does not provide credit repair services of any kind. The information provided is for general educational and reference purposes only. The information is not intended to provide legal, tax, or financial advice. We do not propose any guarantee that the information provided will repair or improve your financial profile. Consult the services of a competent licensed professional when You need financial assistance.