by Kailey Hagen | Updated July 27, 2021 - First published on Jan. 22, 2021
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Try these tips for a whole year and you'll definitely see your credit score go up.
Managing money better is a common New Year's resolution, but if you're ignoring your credit score, you're missing out on a huge opportunity to save yourself some cash and qualify for better loans and credit cards when you need them. Keeping your credit score high is a key part of responsible money management because lenders look at that number when deciding to approve you and what interest rate to offer.
How do you raise your credit score or keep it high? It's simpler than you think -- you can start by trying the three tips below.
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It might sound deceptively simple, but paying your bills on time is actually the most important thing you can do for your credit score. That's because payment history is the most heavily weighted factor in your credit score calculation. It makes up 35% of your FICO® Score -- the most popular credit scoring model in use today.
A single late payment can drop an excellent credit score by several dozen points, but unfortunately, raising it again isn't as easy as making a single on-time payment. Credit scoring models are designed to reflect how you've managed your money over the long term, so it will take months, if not years, of consistent, on-time payments to recover from a late payment.
But don't panic if you're only a day or two late, as most creditors won't report your late payments to the credit bureaus unless you're a month or more behind. That said, you shouldn't make a habit of letting your payment due dates slip past you. As soon as you get a bill, note down the due date and set reminders for yourself if you're prone to forgetting. You could also set up automatic payments from your bank account so you don't have to worry about remembering payments at all.
Your credit utilization ratio -- the ratio between the amount of credit you're using and the amount you have available -- is the second-most important factor in your credit score calculation. It accounts for about 30% of your FICO® Score. You can figure out yours by dividing your current balance by your credit limit. For example, if you have a $2,000 balance and a $10,000 limit, your credit utilization ratio would be 20%.
Keep your ratio under 30% if you want to keep your credit score high. A lower ratio is even better, as long as it stays above zero. If you're not using any credit at all, lenders can't tell how you'll handle things when you need to borrow money. Making a few small charges to your credit card every month and paying them back in full is a great way to demonstrate that you can handle borrowed money responsibly without risking credit card debt.
If you can't avoid exceeding a 30% credit utilization ratio, perhaps because your credit limit is low, you could try applying for a credit limit increase. Another option is to pay your bill twice per month. Credit bureaus only get updates from your credit card issuer once a month. If you pay your bill off halfway through the month and then again at the end, the credit bureaus will only count your ending balance when considering your credit utilization ratio.
Credit card debt can also make it difficult to keep a low credit utilization ratio. If you're carrying a balance, make paying it off your top priority. Put all your extra cash after paying your bills toward that goal every month. You could also consider opening a balance transfer card with a long 0% intro APR period to make your task a little easier.
New credit applications sometimes help your credit, but they can hurt it, too. It depends how often you apply for credit cards and loans and whether you're approved.
Every time you apply for a new credit card or loan, the lender does a hard inquiry on your credit report. This drops your credit score by a few points. It's generally not a big deal, especially since most credit scoring models consider any hard inquiries that happen within about a month of each other as a single inquiry to account for normal credit shopping behavior. But if you're constantly applying for new credit, all those little hits add up.
Lenders may think twice about working with you if you seem to rely heavily upon credit to fund your lifestyle. But if you're approved for a personal loan, credit card, or credit limit increase, your credit utilization ratio will drop, which can raise your credit score.
Avoid applying for new credit unless you feel confident you'll get approved, and even then, limit your credit applications to once every six months at most. If you are shopping around for a loan, get all your applications in as close together as possible to avoid getting slapped with multiple hard inquiries on your credit report.
None of these things are going to drastically alter your credit score overnight, but if you're diligent about sticking with them, you should notice some improvement by the end of 2021. Remind yourself that you're playing the long game and turn these strategies into habits so that once you've gotten your credit score where you want it to be, you can keep it there.
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