How do you improve your credit score?
When you understand how your credit score is calculated, it’s easier to see how you can improve it. That’s the good news: no matter how low your score is, there are a few relatively easy ways that you can change your habits and improve it.
1. Make regular payments
One of the easiest ways to improve your credit score or to build it from the ground up is to make consistent, regular payments on time over time. These are things that potential lenders love to see, like consistency, dependability, regularity, and history.
When it comes to credit cards, the best financial advice is always to pay it off once or twice per month so you’re never running a balance. Making regular payments is one of the best habits to get into because you’re always paying down your debt.
2. Close your newer accounts
Remember when we discussed how your payment history is the biggest part of your credit score calculation? If you have several credit cards and you’re thinking about closing one (or several) of them to help you manage your debt a little better, it’s more advantageous for your credit score to close the most recent one. That way, you can maintain the history with an older account.
You may have some good reasons to close your older accounts, such as a higher interest rate, annual fee, and so forth. If that’s the case, consider your timing. Your purchase of a new car in a couple months, new cell phone contract or application for a line of credit will go smoother if your credit looks as good as possible.
Be aware: Canceling a credit card will always have an immediate negative impact on your credit score, because you are reducing the amount of available credit and usually increasing your debt utilization ratio. It’s easier to pay off the card and set it aside to not use anymore instead of closing it altogether.
3. Accept an increase on your credit limit
Improving your debt utilization ratio is one of the fastest ways to build up your credit; you could even see your score go up 30 to 50 points in a month! The ideal debt utilization ratio is 30%, but it’s best to keep it below 10%.
The best way to do that is, of course, to pay down the balance, but you can also accept offers to increase your credit limit. Be careful, though: If you call in to ask for your credit limit to be increased, you’ll initiate a hard check, and that will hit your credit score.
But when your credit card company sends an offer to increase your limit, and the time is right, look into it. Just be mindful that you're not going into more debt to improve your credit score.
4. Use different kinds of credit when possible
Which do you think a lender would rather see on your credit report: a credit card, or a student loan? A line of credit, or an RRSP loan?
Creditors see revolving credit as less secure than installment credit. If improving your credit score is your goal, then you want to diversify your sources.
It doesn’t have to be a lot. A small loan that you pay off within 12 months will go a long way. Just think outside of the credit card box, or consider a secured credit card.
