Your credit score makes an enormous difference in the cost of borrowing should you want or need to take out a loan. A difference of one percentage point in your mortgage interest rate can mean the difference of tens of thousands of dollars in interest over the term of the loan.
If you think you will need to borrow money in the next several months, or if you simply want your credit score to be the best it can be, try these 6 methods for improving your credit score.
1. Review and Correct your Credit Reports
If you haven’t reviewed your reports from the three main credit ratings agencies (TransUnion, Experian, and Equifax), go to www.annualcreditreport.com and get copies. You can get them free once a year. Look for mistakes, including:
- Old bankruptcies (more than 10 years old)
- Outdated lawsuit judgments (more than 7 years old)
- Incorrect tax liens
- Duplicate debts
- Debts that are not yours
If you spot anything amiss, notify the credit bureau(s). They have to investigate disputed information and remove erroneous information. Follow up to make sure the errors have indeed been removed from your report.
2. Increase Income or Decrease Debt
Your ratio of debt to income affects your credit score. So does the ratio of available credit to the credit utilized. Do all you can to reduce the amount you owe, particularly on credit cards. Show that you are consistently reducing your debt load, and your credit score should improve, even if your income remains the same.
3. Maintain Job and Residential Consistency
The longer you remain at a job and the longer you remain at the same address, the more stable you appear to credit bureaus, and this benefits your credit score. While there is nothing wrong with taking a better job and moving to be near it, a string of different employers and/or addresses over a short period of time can ding your credit score.
4. Start Small with Credit, and Diversify
Credit bureaus want to know you can handle a mix of credit, including revolving debt (credit cards) and traditional loans, like mortgages and car loans. If you have not established a credit history, make regular, on-time payments on credit cards, and borrow reasonably based on your income. If the bank knows you paid back that small loan you took out for a used car, they’re more likely to give you better terms when you want a mortgage.
5. Don’t Close Credit Accounts
If you need to remove the temptation of using your credit cards, then go ahead and cut them up, but don’t close the accounts. The average length your credit accounts have been open is important to your credit score. If you cancel a card you’ve had for 10 years, you can drastically lower that average.
6. Consider Asking for an Increased Credit Limit
This can be risky if you’re tempted to overuse credit. But if you have a good track record with a credit card, getting an increase in your credit limit increases your ratio of credit available to credit used, and this is good for your credit score. Don’t ask for an increase in your credit limit unless your account is in good standing and you haven’t had late or missing payments.