How to Increase Your Credit Score

Most people want a good credit score but have no idea how to get one. They want a good score because they know that it can affect a variety of decisions, including their mortgage’s interest rate and even potential employment.

A person’s credit score is made up of five factors—payment history, credit utilization, length of credit history, credit inquiries and new debt, and types of debt. But each of these factors’ influence on the score is not the same. Some impact the score more than others.

So how do you increase your credit score? Let’s look at the five factors, in order of their influence on the score, and see what can be done.

  1. Payment History. Payment history accounts for 35% of your score. The way to better this factor of your credit score is simple—pay your bills on time, every time. If you are late with your payments and have bills falling through the cracks, don’t shrug them off. Get up-to-date by paying them as quickly as possible and carry on this new habit.
  1. Credit utilization. This accounts for 30% of your score. Credit utilization means you have been approved to borrow a certain amount, but have not borrowed that amount. Please understand, what you do not need to do is take out more credit cards to decrease your utilization. Focus on paying off your credit card balances. When you do pay off a credit card balance, do not cancel the card right away. Wait until it doesn’t affect the utilization ratio as much. If an open credit card is too much of an temptation, close it. Going back into debt is not worth it.
  1. Length of Credit History. This accounts for 15% of your score. Credit bureaus like you to keep the same credit cards for a long time. They like stability. If you have a credit card, work to reduce your balance. And make sure to keep your account(s) for a while. Don’t constantly open new accounts. Credit bureaus like you to keep the same credit card(s) for more than seven years.
  1. Credit Inquiries and New Debt. This accounts for 10% of your score. Only apply for credit when absolutely needed. Don’t take out a store credit card every time they offer you a discount. It is a bad deal. Work to pay off the debt you have without taking on new debt.
  1. Type of Debt. This accounts for 10% of your score. With the two types of debt, installment debt (like a mortgage) is favored over revolving debt (like credit card debt). You may have one or both kinds, but the key is to always be making progress in paying them off. Live within your means, and do not take on more debt than you can handle.

One of the best ways to stay on top of your credit score is to look at your credit report annually. Pay the small fee (usually $15) to get your credit score with the report. Analyze the report. And figure out how you can work to improve your score for the next year. Improving your credit score is not just about raising a number, it is about improving your overall financial health.

Understanding Your Credit Score

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