Making a big-ticket purchase is a key moment in anyone’s life. Whether it’s major appliances, a car, or even a home, it can be an eye-opening experience – especially if you find out your previous financial missteps are preventing you from getting a car loan or mortgage on good terms.
Many people seek to rebuild their credit after such financial missteps. Improving your credit score is a wise decision that can save you hundreds or thousands of dollars in interest rates.
This article will explore the factors that affect your credit score and several ways to improve it.
Factors That Affect Your Credit Score
Understanding the components of your credit score is the first step in improving it. Here are the key factors:
- Payment history (35%): This is the most significant factor. Consistently paying your bills on time will positively impact your score, while late or missed payments will hurt it.
- Credit utilization (30%): This refers to the amount of credit you are using compared to your total available credit. Keeping your credit ratio below 30% is ideal.
- Length of credit history (15%): A longer credit history generally boosts your score. This includes the age of your oldest account, the age of your newest account, and the average age of all your accounts.
- Credit mix (10%): Having a variety of credit types (credit cards, installment loans, mortgage loans, etc.) can improve your score.
- New credit (10%): Opening several new credit accounts in a short period can lower your score temporarily due to the associated hard inquiries.
Ways to Improve Your Credit Score
1. Pay your bills on time
Consistently paying your bills on time is the most important factor in maintaining a good credit score. Here’s how to ensure timely payments:
- Set up automatic payments: Many banks and credit card companies offer the option to set up automatic payments for at least the minimum amount due. This way, you never miss a payment due date.
- Create payment reminders: Use calendar alerts on your phone or email reminders to notify you a few days before your bills are due.
- Consolidate bills: If you have multiple bills, consider consolidating them into one payment through a debt consolidation loan. This simplifies your payments and can reduce the risk of missing a due date.
- Prioritize payments: In situations where funds are tight, prioritize bills that directly impact your credit score, such as credit card payments and loans.
- Maintain a budget: A well-structured budget can help you manage your finances better, ensuring that you allocate enough funds for your bills each month.
2. Reduce credit card balances
High credit card balances relative to your credit limit can negatively impact your credit score. Here are steps to lower your credit use ratio:
- Pay more than the minimum: Paying only the minimum amount due can keep you in debt longer and result in higher interest payments. Aim to pay as much as you can afford each month.
- Focus on high-interest debt: If you have multiple credit cards, prioritize paying off those with the highest interest rates first. This approach, known as the avalanche method, saves you money on interest in the long run.
- Make multiple payments: Instead of waiting until your bill is due, consider making multiple payments throughout the month. This keeps your balances lower and can improve your credit utilization ratio.
- Transfer balances: Look for credit cards with low or 0% introductory interest rates on balance transfers. Transferring high-interest balances to these cards can reduce the amount of interest you pay, helping you pay off your debt faster.
- Increase your credit limit: Contact your credit card issuers to request a credit limit increase. A higher limit can improve your credit utilization ratio, but ensure you don’t increase your spending as a result.
3. Avoid opening new accounts unnecessarily
Opening new credit accounts can have a temporary negative impact on your credit score. Here’s how to manage new accounts wisely:
- Evaluate necessity: Before applying for a new credit card or loan, consider whether it is necessary. Each application results in a hard credit inquiry, which is when a lender evaluates your credit. Such an inquiry will appear on your credit report and may affect your credit score.
- Limit credit inquiries: If you need to apply for new credit, try to limit your applications to a short period. Credit scoring models often group multiple inquiries within a short time frame (typically 14-45 days) as a single inquiry, especially for mortgages, auto loans, and student loans.
- Consider the long-term impact: New credit accounts can lower the average age of your credit history, which may hurt your score. Think about the long-term impact before opening new accounts.
- Shop around wisely: When looking for a new credit card or loan, do your research before applying. This way, you can find the best terms without having multiple hard inquiries on your credit report.
- Monitor your credit: Keep an eye on your credit report to understand how new accounts are affecting your score. Many services offer free credit monitoring, which can alert you to changes in your credit report.
4. Check your credit report for errors
Regularly reviewing your credit report is essential for maintaining a healthy credit score. Errors can negatively impact your score, so here’s how to ensure your credit report is accurate:
- Obtain your credit reports: You are entitled to a free credit report from each of the three major credit bureaus (Experian, TransUnion, Equifax) once every 12 months through AnnualCreditReport.com. Take advantage of this to check your reports regularly. Sign up for each four months apart so you can get a continuous view of your credit.
- Review carefully: Go through each report meticulously. Look for errors such as incorrect personal information, accounts that don’t belong to you, inaccurate account statuses (such as showing a closed account as open), and outdated information.
- Dispute errors: If you find an error, file a dispute with the credit bureau that issued the report. This can usually be done online, by phone, or by mail. Provide documentation to support your claim. The credit bureau is required to investigate and respond within 30 days.
- Follow up: If the credit bureau agrees with your dispute, they will correct the error and send you an updated report. If they disagree, you can contact the creditor directly or escalate the dispute.
- Monitor regularly: Consider enrolling in a credit monitoring service that alerts you to changes in your credit report. This can help you catch and address errors quickly.
5. Become an authorized user
Being an authorized user on a family member or friend’s credit account can help improve your credit score, especially if the primary account holder has a strong credit history. Here’s how it works and how to do it:
- Choose the right account: Ideally, the account should have a long, positive credit history with no late payments and a low credit utilization ratio.
- Get permission: Ask a family member or trusted friend if they are willing to add you as an authorized user on their credit card account. They should understand that they are responsible for all charges made to the account, even if you make them.
- Verify reporting: Ensure that the credit card issuer reports authorized user activity to the credit bureaus. Not all issuers do this, so it’s important to confirm beforehand.
- Monitor the account: Keep an eye on the account’s activity. While you’re not liable for payments, negative activity on the account can impact your credit score.
- Manage your usage: If given a card, use it responsibly. Making small purchases and paying them off immediately can demonstrate good credit behavior.
6. Negotiate with creditors
Negotiating with creditors can help you manage your debts more effectively and potentially remove negative items from your credit report. Here’s how to approach negotiations:
- Understand your situation: Before contacting creditors, review your debts and financial situation. Know what you owe, to whom, and how much you can realistically pay.
- Prepare your case: Gather documentation that supports your case for negotiation. This could include pay stubs, bank statements, or letters explaining financial hardships.
- Contact creditors: Reach out to your creditors directly. Explain your situation honestly and ask if they can offer any assistance, such as a lower interest rate, a reduced payment plan, or a temporary forbearance.
- Negotiate removal of negative items: If you’ve already paid off a debt or are willing to settle, ask the creditor to remove the negative item from your credit report in exchange. This is known as a “pay for delete” agreement.
- Seek professional help if needed: If you’re struggling to negotiate with creditors, consider working with a credit counselor. Nonprofit credit counseling agencies can help you create a debt management plan and negotiate with creditors on your behalf.
Get Your Credit on the Mend With AZCCU
Improving your credit score is a journey that requires patience and persistence. By understanding the factors that influence your score and implementing the strategies mentioned above, you can gradually rebuild your credit.
Arizona Central Credit Union has different ways to help you build your credit, including credit cards with low interest rates that may help you move toward that elusive goal of a credit score of 800 or more. If you have any questions, contact us online or call (866) 264-6421.
