You can improve yours, but it could take time
Your credit rating can greatly affect your finances. Having a low rating can mean you end up paying up to $5,000 more for an auto loan compared to what you’d pay if you had a high score. Worse, a low grade can make it harder for you to get a loan.
However, according to a recent survey of approximately 1,500 consumers conducted by the U.S. News & World Report, many Americans are misinformed about their credit ratings and, in particular, how to improve them.
How to improve your credit rating
- Pay your credit card and other bills on time. 35% of the FICO rating is determined by your payment history, which is how often you pay on time. It’s better to pay the minimum every month than to fall behind.
- Review your credit reports. Request a free credit report from a different reporting agency every 4 months through AnnualCreditReport.com. “For CIS regarding” credit inquiries (from a potential lender and others with your permission) may slightly reduce your grades, but there is no penalty for reviewing it yourself.
- Don’t request many credit cards at once. Unlike applying for a mortgage, auto loan, or student loan, applying for multiple credit cards generates multiple “force queries” about your credit history and can negatively affect your rating.
- Don’t open too many new credit accounts at once. By doing so, you reduce the average “age” of your accounts, which can lower your credit score.
- Don’t cancel unused cards (unless you have to pay an annual fee). Part of your rating depends on the credit ratio used in relation to the total available credit. Deleting a card reduces your line of credit and can increase the coefficient, which can hurt you.
- Keep credit balances low. It’s smart to maintain a variable credit balance below 10% of your total available credit. A higher proportion indicates a high credit risk. “If you use your total limit or are close to the limit, your ratio will be negatively reflected, which in turn will negatively affect your credit rating,” says Katie Ross, Education and Development Manager at American Consumer Credit Counseling, a nonprofit organization that provides consumer guidance and is headquartered in Boston.
- Maintain a variety of credit types. Correct payment of, for example, an auto loan, student loan, and credit card bills during the same period shows that you can maintain different types of credit. This represents 10% of your rating.
- Pay the debts that went into collections. Most current versions of the FICO rating ignore collections with a balance of zero.
- Be careful when maintaining high balances. If, for example, you pay everything with a rewards card for points, start using cash or a debit card for a couple of months before you apply for a new credit. Lenders can’t know about your score if you fully pay your balances every month. But if you can see thanks to your credit rating, you’re charging a lot on your cards relative to your credit limit. That can be interpreted in a negative way.
- Get a personal loan to pay off your credit card debt. You can improve your credit rating by applying for a personal loan to pay off your credit card debt. The interest rate on the loan is also likely to be lower than the interest rate on credit cards.
- Get a secured credit card after a bankruptcy. If you’ve been bankrupt, start completing your credit report with good credit. Using an insured credit card (which is linked to a bank savings account) can be an effective way to rebuild your credit. A bankruptcy will have a minor impact on your rating over time, as long as you don’t stop paying off new loans. However, keep in mind that bankruptcies under Chapter 7 and Chapter 13 remain in your credit report for up to 10 years.
- Consider getting a little help from alternative data. Consumers with not-so-bright ratings can now get lenders to consider other tax liability indicators, such as regular utility payments or mortgages. Experian Boost allows consumers to give Experian read-only access to bank account information to show their payment histories. The service only takes into account positive information and may be deactivated at the discretion of the consumer. (A new similar service, UltraFICO, focuses on how well the consumer handles their money, taking into account things like keeping a balance on savings and avoiding unfunded checks.) The advantage may not be large, but it can potentially help with the credit score of many consumers.