Want to make a serious change to your credit score in 2021? Here are all the credit-building methods that make the biggest difference.
If your goal is to increase your credit score, that probably means you want to see results quickly. Because let's be honest -- there's nothing exciting about seeing your credit score tick up by a few points.
While improving your credit score is a process, it doesn't always need to be a long one. By following a few tips, you could raise your score by 50 points or more before the end of the year.
1. Dispute errors on your credit report
There's no better way to boost your credit score than by getting rid of negative items on your credit report. Some consumers have been able to raise their scores by over 100 points in a matter of months this way.
To start, you need to pull a credit report from each of the consumer credit bureaus (Equifax, Experian, and TransUnion). You're entitled to one free report per year from each bureau, but through April 2021, they're all offering free weekly credit reports.
Look for any negative items, especially late payments and accounts that have gone to collections. If any of these are inaccurate, dispute them with the credit bureau. You can do so by phone or online through the following links:
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2. Work on paying down high credit card balances
Your credit card balances play a huge role in your credit score. In particular, it's important to have a low credit utilization ratio. That ratio is your current card balances compared to your credit limits.
The ideal credit utilization ratio is 20% or less. If you have $5,000 in total credit limits, you should aim for a total balance of $1,000 at most.
For an example of how much credit utilization matters, one personal finance writer's credit score fell by 32 points when she went over 50% credit utilization.
If your credit utilization is higher than 20%, put as much of your extra cash as possible toward your credit card debt. Once you pay down those balances, you should see your credit score go up in one or two months.
3. Consolidate credit card debt
Paying down balances is the simplest way to lower your credit utilization. There are a couple other options, though. You could consolidate credit card debt with either of the following financial products:
- Balance transfer credit cards: These cards offer a 0% intro APR on balances you transfer over from other credit cards. The benefits of opening a balance transfer card are two-fold. You'll have time to pay down debt with no interest charges, and that new card's credit limit will add to your total credit. More total credit means your credit utilization will decrease.
- Debt consolidation loans: These are loans you can use to pay off your credit cards. Your loan will likely have a lower interest rate than your credit cards, and you'll be able to pay it off in fixed monthly payments. This also lowers your credit utilization, because installment loans don’t count toward your credit utilization ratio.
Whichever method you choose, your credit utilization will decrease, which should increase your credit score.
Keep in mind that you still need to work hard on paying off debt even after a balance transfer or loan. Don't make the all-too-common mistake of relaxing and spending more just because you've gotten a lower interest rate for your debt.
4. Make all your payments on time
Your payment history is the factor that impacts your credit score the most. When you pay credit cards or loans on time, that goes on your credit file and improves your payment history. On the other hand, if you're late by 30 days or more, that goes on your credit file and hurts your payment history.
Now, your credit score probably isn't going to skyrocket just because you made a few payments on time. But it will get better and better as those on-time payments start to add up.
The only way to consistently improve your credit is to pay on time, every time, so make sure you don't miss any payments. You may want to set up auto-pay or payment reminders to help.
5. Don't apply for new credit cards or loans
Every time you apply for new credit, it can affect your credit score. Here's why:
- Hard credit inquiries: A credit application requires that the lender performs a hard credit inquiry on you to check your credit file. Each inquiry can lower your credit score by a small amount.
- The age of your credit accounts: Opening a credit card will lower the average age of your credit accounts. This factor has a moderate impact on your credit score.
Neither of those is a big issue, as they won't ruin your credit. However, they can cause a credit score drop. If you're trying to boost your credit score by a large amount, you need to avoid anything that will lower it.
Increasing your credit score by more than 50 points is no small feat, but that's also what makes it such a great goal. If you follow all the above recommendations, your credit score will be on the way up for 2021.
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As someone deeply immersed in the world of personal finance and credit management, I understand the nuances of credit building and the strategies that yield tangible results. My expertise in credit score improvement stems from a comprehensive understanding of credit reporting agencies, credit scoring models, and the intricate details of financial behavior that influence credit scores. Let me guide you through the concepts touched upon in the article on making a serious change to your credit score in 2021.
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Dispute Errors on Your Credit Report:
- Obtain your free credit reports from Equifax, Experian, and TransUnion.
- Scrutinize for inaccuracies, especially late payments and accounts in collections.
- Initiate disputes through the respective credit bureaus' online portals or by phone.
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Work on Paying Down High Credit Card Balances:
- Credit card balances significantly impact your credit score.
- Maintain a low credit utilization ratio (ideally 20% or less).
- Pay down balances to improve the ratio and, consequently, your credit score.
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Consolidate Credit Card Debt:
- Balance Transfer Credit Cards: Utilize cards offering a 0% introductory APR on transferred balances to reduce interest charges and increase total credit.
- Debt Consolidation Loans: Secure a loan with a lower interest rate than credit cards to pay off balances and decrease credit utilization.
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Make All Payments on Time:
- Payment history has the most substantial impact on your credit score.
- Consistently pay bills on time to build a positive payment history.
- Consider setting up auto-pay or reminders to avoid missed payments.
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Don't Apply for New Credit Cards or Loans:
- Hard credit inquiries during credit applications can slightly lower your credit score.
- Opening new credit accounts can reduce the average age of your credit accounts, affecting your credit score moderately.
- To boost your credit score, avoid unnecessary credit applications and maintain the age of your credit accounts.
Remember, the key to a successful credit score improvement strategy is a holistic approach. By combining these methods and staying disciplined in your financial habits, you can witness a substantial increase in your credit score. If you're committed to this journey, the financial landscape in 2021 can indeed be the backdrop for a positive transformation in your creditworthiness.
