If there’s anything the recession taught us, it’s the importance of avoiding excessive debt and maintaining a good credit score. Even now, lenders require better credit than they did five or ten years ago. So whether your goal is a new credit card, auto loan, or a mortgage, you may need to improve your credit score to do so.
Here are a few simple steps you can take to improve your credit score.
The Three Best Ways To Improve Your Credit
The best ways to improve your credit score, assuming you already have a few open lines of credit, is to:
- Pay every bill on-time every month. Whether or not you’ve missed payments in the past, a consistent record of timely payments going forward is the single best thing you can do to improve your credit.
- Pay down credit card debt. Too much debt drags down your credit score, especially if one or more credit cards are maxed out. Work on reducing these balances to improve your credit.
- Don’t apply for new credit. (At least until you really need it). Opening new cards to transfer balances will most likely lower your credit score. If you’re trying to improve your credit for a car loan or mortgage, don’t apply for other credit for six months to one year beforehand.
Other Ways to Improve Your Credit
If you only have one or two credit accounts on your credit report, opening a new line of credit like a credit card may actually improve your credit score over the long run if you pay it on time. Unfortunately, credit cards aren’t approving many people these days. And you want to avoid applying for several cards and being declined, because anytime you request a new line of credit, whether or not your approved, it appears as an inquiry on your credit report. If you have more than two or three of these within six months to a year, it can decrease your score.
What to do? If you seriously need to build your credit and only have one or two accounts, open a card that you know you’ll be approved for. Many applicants with credit scores about 600 can qualify for the Capital One Platinum Credit Card.
Use your cards once or twice a month and repay them in full for six months to a year, and you should be able to add a few points to your credit score. (Note: It’s a myth that you need to carry a balance to build good credit. In fact, the lower your balance on your credit card accounts, the better your credit rating).
Keep an Eye on Your Credit
As you work to improve your credit score, you want to make sure your efforts are paying off. To do that you’ll need to monitor your credit report and score periodically. You can obtain a truly free copy of each of your three credit reports (from Experian, TransUnion, and Equifax) once a year from annualcreditreport.com. This is the only site that is truly free, as required by federal law.
Although you should check these reports at least every year to ensure a.) you haven’t been the victim of identity theft and b.) your creditors are reporting account information accurately, these reports don’t provide any of your credit scores (like credit reports, you actually have multiple credit scores, even though FICO is the most commonly mentioned).
CreditKarma is a free service (supported by advertising) that lets you see your TransUnion credit score as often as you want. Alternately, you can enroll in a credit monitoring service for between $15 and $20 a month. These services will provide you with unlimited access to both your credit reports and scores. These services are good for consumers who are serious about increasing their credit scores in a year (to purchase a home, for example). For others, checking your scores once a year for free may be adequate.
It’s important to note that checking your credit score or report—whether it’s through annualcreditreport.com, CreditKarma, or another credit monitoring service, does not lower your credit score in any way. Checking your own credit is known as a “soft credit check”. When banks check your credit because you applied for a loan, it’s called a “hard credit check” and it will appear on your report and may temporarily lower your score.