Your credit score is like a grown-up version of a report card, for your finances. It shows a record of how you’ve used credit like credit cards or loans in the past, and if you were able to stay on top of other bills, too.
It’s not easy to guess what goes on your credit report, or how to build a higher score. Read below to find out how to get started with improving your credit score and how to keep it high.
Pay Your Bills on Time
The biggest element in your credit score is if you pay your bills on time every month. That makes up a huge portion of your credit score. When you make a late payment, the company notifies the credit bureaus that produce your credit scores.
To make sure you aren’t paying late, set up automatic payments from your bank account for all your bills. You can pay just the minimum if you can’t afford to pay the entire statement at once.
You can also create recurring calendar reminders in your phone, calendar or planner. If you prefer getting physical reminders of your bills, sign up for paper statements to be sent to your home.
As soon as you notice a late payment, call the company and make a payment right then. Usually, a payment needs to be more than 30 days late for it to show up on your credit report.
Lower Your Credit Use
A credit score tells prospective and current lenders how you’ve used credit in the past. One of the factors that determine your “creditworthiness” is how much credit you’re currently using compared to how much you have available, also known as “credit utilization.” This makes up 30% of your credit score, so it’s an important piece of the puzzle. This mostly affects credit cards and lines of credit.
You can find your credit utilization ratio or percentage by dividing your current credit balance by the available credit limit. Look up your credit card bill and view the most recent balance and then find the total credit limit.
If your balance was $600 and your credit limit is $1,200, then your utilization percentage is 50%. That means you should pay off more of your balance or call the credit card provider to increase the limit – just remember, a higher limit doesn’t mean you should use it more! The goal is to keep your utilization below 30%, or $400 in this example.
It’s not uncommon for your score to be low because of a mistake or error on your credit report. That might be because your identity was stolen, and someone opened a credit card in your name. It might also be because you didn’t get a bill in the mail and the lender sent the bill to collections.
Look at your credit report to see if there are any mistakes and call the lender to ask about any collections or defaults. If you find an error, try to fix it as quickly as possible. This is especially important if you’re in a consumer proposal, which is often mis-reported as a bankruptcy.
Avoid Opening New Accounts
Too many new accounts will affect the average age of your credit accounts. If possible, don’t open any new accounts unless you absolutely need it. If you have a lot of new accounts, a lender might think you don’t have enough cash on hand.
Want to talk through your credit report with an expert? Contact us for a free credit consultation.
About the Author
Zina Kumok is a trained journalist and has covered everything from professional sports to murder trials. Now, she specializes in personal finance and has written for brands and publications such as Mint, Investopedia and Discover. She paid off $28,000 worth of student loans in three years.