How to Improve your Credit Score | AD

*This is a collaborative guest post

Your credit score is an important three-digit number impacting your financial life. This is particularly true if you are looking to get a loan or apply for a credit card anytime soon. Lenders use your credit score to help them decide how likely you are to pay your credit card debt or loan on time. The higher your credit score, the more likely you are to qualify for a credit card or loan at a favorable interest rate.

Most Americans have lower credit scores than they anticipate. One in three Americans have a credit score below 600, which represents a bad to fair rating. Having bad credit gives you limited options for getting a loan.

There are, however, a few online bad credit loan lenders that will give borrowers a loan no matter their credit score. With many Americans suffering from bad credit, particularly veterans who are part of the highest unemployed demographic, this is good to know. Visit this website for a list of the top personal loans for veterans with bad credit.

While you may be able to still get a loan with bad credit, the lenders will likely hike up the interest rate making the loan seem less unappealing. This is when you need to start looking at ways in which you can improve your credit score. A good credit rating will open many doors for you, not only with getting a loan.

How to improve your credit score

The first thing that you need to do is check your credit score. You need to know how good or bad it is, and where the bad marks are. You can use a free service to check your credit score – not more than once a year – and it won’t impact your score. You should note, however, that too many enquiries on your credit report can negatively impact your score. You need to plan in advance to make sure that you don’t need to check your credit report too many times.

Once you know how much you need to improve your rating, then you can go through the below steps to start increasing your credit score. Also, remember that improving your credit score takes time. It will take a while to start seeing the improvements, so best start as soon as you can and be patient with the process.

1. Keep up to date with your payments

Getting behind on your current bills will negatively impact your credit score. It’s a good idea to keep your debts in the green, showing possible lenders that you are able to keep up with repayments. Your payment history is one of the most influential factors in the final credit score.

The longer your payment history and the more consistent, the better. Set up direct debit orders on your utility bills, phone and credit card payments helps to make sure that you don’t fall behind. It’s easy to forget to pay a bill on some months, so a direct debit order will ensure that you never do. Late payments, defaults, repossessions and foreclosures are not good for your credit score. The same goes for settling accounts for less than the full amount you owe. Failing to repay a debt as you originally agreed with the loaner can negatively affect your credit.

A common misconception is that you need to carry a monthly credit card balance to build your credit history. This is not the case. You can pay off your credit card bills each month and positively affect your credit standing.

2. Keep your credit utilization low

Try to keep your current credit low. Keeping your current credit card utilization low shows that you can manage your credit sensibly without maxing out your credit cards. Your credit utilization ratio indicates how much of your available credit you use each month.

In order to get your average credit utilization ratio, you need to look at your credit card statements from the last 12 months. Add up the balances for each month and divide by 12 – that will show how much credit you use on average each month. Typically, lenders prefer ratios of 30% or less – indicating that you only use 30% of your available credit.

3. Don’t open too many credit cards

Don’t fall into the trap of opening credit cards just to improve your credit rating. Having too many unnecessary credit cards can harm your credit score in a few ways, one of which being too many hard queries on your credit report. Hard inquiries will remain on your credit report for two years. More credit cards will also tempt you to overspend, thus accumulating more debt.

It’s best to maintain a mix of credit in order to establish a good credit history. This includes a mix of credit cards, store accounts, mobile contracts and home loans.

4. Monitor fraud/errors on your credit report

Besides knowing how much you need to improve your credit rating, checking your own credit report can help you spot fraud/errors and get rid of them.

While most errors result from human error, there are times where it may be a case of fraud. You’ll be able to spot signs of identity theft, such as new credit accounts that weren’t set up by you or enquiries on your report that you didn’t know about.

5. Keep old debts and credit cards on your credit report

You may want to get rid of your old debts as soon as you’ve paid them off, but it could be a good idea to keep them on your credit report. As long as you made regular timely payments your old debt records may actually help your credit score.

An account that is paid in full is a good thing. The same goes for keeping old credit cards open. Having an account with a long history and good track record of bills paid on time shows possible lenders that you have responsible habits.

Closing an account may also increase your credit utilization ratio. Just make sure that they aren’t costing your money.