Whether you're totally new to having credit or are looking to improve your score after some mistakes in your past, it can be hard to know where to start when it comes to raising the number which decides how much you can borrow and the favorability of your agreements when you borrow. If you're not sure what the right course of action is for your credit score, don't worry, this guide has everything you need to know to behave like a credit pro.
Your credit report is what lenders will check before determining if you qualify for a loan, but there are actually multiple credit reporting agencies, so you don't have just one score. The good news is the law entitles you to a free annual report every year and you should take advantage with your report from all three of the major credit reporting agencies so that you know exactly what your creditors know.
With your credit report you can begin to identify the areas where you are lacking which are causing your credit score to be lower than desired. If you have a lack of credit accounts you will want to open new lines of credit responsibly, for example. If you have missed payments on your report you will see how important it is to not allow that to occur going forward.
Once you know what your weak areas are you can begin working to rectify them. Here's what you need to do for each potential shortcoming:
- Hard inquiries: If you have applied for too many credit accounts in the last two years it will reflect negatively on your credit score. To minimize the number of hard inquiries on your account you should only apply for lines of credit which you have a reasonable chance of attaining given your credit score and income.
- Total accounts: Existing credit accounts provide reporting agencies the opportunity to more-accurately assess your risk as a borrower so if you are lacking in accounts it can reduce your ability to attain a high score. If you are just starting your credit history you will likely score poorly for total accounts, but you can begin to fix it by slowly applying for new lines of credit in the years to come.
- Credit Age: If your credit report shows that you do not have previous accounts open it is imperative to begin your credit history as soon as possible. A small credit card is your most likely option for a successful application, though you may be required to opt for a secured card.
- Derogatory Marks: If you've had a major credit occurrence such as a bankruptcy, default, foreclosure or going into collections it will negatively affect your credit score. Though these derogatory remarks will remain until they age off of the report you can ensure that additional marks do not accrue by remaining responsible with your borrowing and keeping all your credit accounts in good standing.
- Payment History: Consistent payment of all your bills on time is absolutely vital to your credit score. While paying extra for high-interest bills is excellent, if it's done at the expense of making a minimum on an account with a lower interest rate then you're doing more harm than good. As you continue paying every bill each month you will eventually allow any negative marks from missed payments to age off your report until you have a perfect payment history.
- Credit Card Utilization: High credit card balances compared to your total available credit are a concern to lenders as they signify that you may be a risk for defaulting on your credit obligations if they get out of hand. Paying down your credit card balances should be a primary goal for improving your credit score once you have satisfied your minimum payments for all accounts. Paying down your higher interest cards first will also help to lower your credit card utilization as it results in less interest being added to your debt each month, saving you money and reducing the increase to utilization caused by interest. Requesting a credit limit raise on a card can also lower utilization by providing more unused credit.
Although it's important to understand what is important for yourself, that doesn't mean you should be going through the credit recovery process on your own. Using a credit monitoring service or app allows you to receive guidance on your journey to an improved credit score, as well as invaluable credit monitoring throughout the year between your free annual reports.
Credit monitoring can alert you in the event of new activity on your credit report, allowing you to more easily catch fraud should you fall victim to it, and gives you an up-to-date snapshot of your credit standing so that you can see the positive effects your credit changes are having throughout the year.
It can be easy to get discouraged when working to raise your credit scores because it is rarely a short process. While there are occasions where all you need to do is one simple thing to make a big change, your credit score generally requires a long pattern of responsible behavior to go up.
It's important that you don't lose motivation due to the incremental progress, because as hard as it is to raise your score overnight, you can cause it significant harm in a very short period of time.
As long as you remain consistent with responsible actions you will see your credit score continue to rise until you have reached the levels you're targeting.