Your three-digit credit score has a significant impact on your finances. Unfortunately, it’s much easier to ding your credit score than it is to improve it. However, there are several ways you can boost your credit score and regain access to better interest rates and offers from credit card companies. Improving your credit score takes dedication and patience, but if you follow the six steps, you’ll start to see your credit score climb.
Look for Errors on Your Credit Report
Reviewing your credit report is the first step to repairing your score. You can get a free copy of your credit report every 12 months from Equifax, Experian, and Transunion. Catching errors on your report is perhaps the quickest way to rebuild your credit.
Imagine that your credit report shows a collection account that doesn’t belong to you, dating back three years. The first way to rectify an erroneous collection is to dispute it with one (or all) of the credit reporting agencies. It’s important to note that a mistake may only show up on a report from one credit reporting agency (i.e., Experian) without showing up at the other two.
Pay Past Due Accounts
Past due accounts – also known as delinquent accounts – can significantly hurt your credit score. In the context of credit cards, a delinquent account is one that has not made a minimum payment for a month or more. Most financial institutions will report an overdue account after 30 days. Unless you request that the creditor adjust your credit report, these outstanding amounts will stay on your credit report for seven years.
Once you pay off outstanding debt, it will reflect “closed” or “paid-in-full” on your credit report. Having outstanding past-due amounts makes it much more difficult to obtain credit relative to having those accounts in “closed” status.
A good, general rule of thumb is that you should pay overdue accounts with the highest interest rates first. For various debt paydown techniques and the associated total interest costs, check out Chunk’s paydown strategies after signing up for an account.
Improve Your Credit Utilization Rate
Your credit utilization rate can easily sway your credit score – after all, utilization accounts for about 30% of the credit score calculation. So, what exactly is your credit utilization rate? This rate is a metric that measures the current amount of credit you’re using divided by the total amount of credit available to you.
There are two main ways to improve utilization – increase your credit line (i.e., open another credit card) or use less credit. Most financial experts recommend a credit utilization rate under 30% while others suggest a rate below 10%. If your credit utilization is relatively high (more than 30%), lowering it through one of the previously mentioned methods will give you a quick credit score boost.
On the Chunk app, we offer a real-time credit utilization tracking tool to help you stay in the know. You no longer need to track your utilization across multiple platforms or resort to doing so manually.
Get a Debt Consolidation Loan
Although some personal finance experts advise against taking out debt to improve your credit score, it can help in some cases. You can combine your debt into one payment by getting a debt consolidation loan. This type of loan is excellent for consumers who are juggling various types of debt with high-interest rates.
Because a lender does a hard pull when you apply for a debt consolidation loan, you’ll notice a slight dip in your credit score at the beginning. However, now that you’re paying all your debt with one payment, it’s easier to stay on track and avoid missing payments. A recent study by Transunion found that 70% of consumers who consolidated debt increased their credit score by more than 20 points.
On the Chunk app, we offer debt simulation tools that help you minimize the amount of interest you pay. Whether you consolidate debt or not, debt simulation is an excellent way to strategize your debt repayment plan. Moreover, our tool can help you identify the best way to pay off a loan.
Hang on to Old Credit Cards
If you have old credit cards sitting around, chances are you are tempted to cut them up. Hang on to those old credit cards, even if they’re collecting dust. Use them as little as you need to keep the account open (just don’t forget to set auto-pay on little used cards to avoid racking up unexpected interest costs). The length of your credit history makes up about 15% of your credit score. When you close old credit cards, you may hurt your credit score by lowering the average age of accounts as well as your credit utilization rate.
If you can boost your credit score from “fair” to “excellent,” you’ll open the doors to lower interest rates and origination fees when taking out new loans such as mortgages and auto loans. You’ll also have an easier time if you’re in the market to rent an apartment – most landlords require some sort of credit check in the application process.
Tackle the Root Cause
You likely won’t get a credit score boost if you’re improving certain aspects of your credit profile, but losing ground in others. It’s important to identify the source of your low score in the first place. Fortunately, your credit report should explain the why, but it’s up to you to prevent the issue from recurring.
Perhaps you were using too much credit, which subsequently inflated your credit utilization rate. In the future, you should either obtain new credit or not use as much credit each month. Whatever, the reason, its important to set reasonable goals and stay on top of your finances. On the Chunk app, you can set alerts to notify you when you are approaching your credit limit or spending more than you planned for a given month. By following a few simple steps, you can be on your way to the 700+ credit score club in no time.