Few things are more indicative of your financial health than your credit score — at least in the eyes of lenders and other important organizations — so it’s imperative that you do everything within your power to raise your credit score.
Want to buy your first home? Your credit score will determine whether you qualify for a mortgage. Need a loan to purchase a new car after your old one went kaput? A car dealership is going to rely on your credit score to determine whether or not you’re financially responsible. Renting an apartment? A credit score can actually impact the size of your security deposit.
If you’re asking yourself, “How can I improve my credit score?”, the following tips should help you get started on the path to better credit, saving you money and headaches.
1. Pay Off Credit Card Balances
Do you have outstanding debt on credit cards? Your first priority should be paying down your balances. The quicker you can pay off your credit card debt (which is considered “bad debt” by lenders in part because of its high interest rates), the sooner you’ll see your score improve.
Once you fix the problem, though, it’s up to you to keep up with maintenance.
In other words, once you’ve paid off your balances, start paying your statement in full each month whenever you can. This will help prevent the problem of large credit card balances in the first place.
2. Watch Your Utilization Ratio
One of the major factors driving your credit score is something known as your credit utilization ratio.
This number is calculated by taking the amount of credit you use in a given month and dividing it by the total amount of credit you’re approved for. So, if you spend an average of $1,000 on your credit card each month and are approved for $5,000 per month, your utilization ratio would be 20%.
The lower your utilization ratio, the better. A ratio under 30% shows creditors that you are responsible enough to spend well beneath the limits imposed on your account.
3. Check for Errors
About 5% of consumers have errors on their credit reports bad enough to result in a higher price for a financial product or insurance,” expert Bev O’Shea says. “The Federal Trade Commission warns that about 1 in 4 reports contains errors that might have at least a small, negative effect on consumer scores.”