If increasing your credit score is on your New Year’s resolution list, now is the time to start.
It might seem like a daunting task, but your hard work will pay off as a higher credit score means better interest rates on mortgages, auto loans, and more.
Most personal finance experts say that a score of 600 or more is a good number to aim for. (You can check your score through your online banking site or request a free credit report at AnnualCreditReport.com.)
Don’t worry if you’re not there yet: even if you’re at the bottom of the scale, you can boost your credit score with careful planning and discipline.
Here’s how to do it.
Set up automatic payment on your credit cards and student loans
Quick reminder: A credit score is a measurement typically ranging from 300 to 850 that determines your likelihood of paying your bills on time. Most lenders use the FICO scoring model, which digs into your credit report and assesses different factors to make your score stand out.
Since payment history accounts for 35% of this score, making payments on time, all the time, is a sure-fire way to increase it.
“If you’re making late payments, that’s the most damaging thing,” says Andrew Westlin, Certified Betterment Financial Planner (CFP).
If your credit card or student lender gives you the option to set up automatic payments online, then do so. And if you can afford to make more than the minimum monthly payment, then do that too – it will help you pay less interest in the long run.
FYI: COVID-19 forbearance for federal student loans ends on May 1, 2022. If you were using automatic payment to pay off these loans, you will need to re-enroll before your next payment is due.
If you’ve got a few years of student loan repayment ahead of you, don’t worry. Having a few different types of credit (like student loans and a mortgage) actually helps your credit score, since the credit mix makes up 10% of your total score.
Use less of your available credit
Credit usage, or the amount of available credit you have versus the amount you owe, is 30% of your credit score.
A credit usage of no more than 10% will keep you out of red flag territory on the credit bureaus. So if you have a credit card with a limit of $ 1,500, for example, try to keep your balance at a maximum of $ 150.
The best solution, of course, is to pay off your entire balance before each month. This way you will avoid interest payments. (Banks take advantage of the fact that few people do.)
If you have high-interest debt, you may be eligible for a low-interest personal loan or a balance transfer card to pay it off and increase your credit score. Average credit card APR is 14.58%, according to latest Federal Reserve data. At the same time, the average APR for personal loans is 9.41%, according to Experiential. A good credit score can help you get as low as 3%.
Another option is a Balance Transfer Card, which has an introductory 0% APR for anywhere from 12 to 18 months. So if you pay off your debt during this introductory period, you’re essentially taking the interest off your existing credit card debt and paying it off faster.
If you don’t have a long credit history, consider credit loans, which are short-term, low-interest loans that help build credit.
Make sure you manage all of these options responsibly. Falling behind on loan payments hurts your credit score, and switching from a balance transfer card to a balance transfer card will also go a long way.
Likewise, new credit applications make up 10% of your credit score, so don’t overdo it.
Sign up for free credit building programs
Experian offers a free service called Experian Boost, which allows you to link your bank account to your credit score, so that payments on cell phone bills, utilities, and streaming services can be counted there. This is a good option for people with a short credit history (which, by the way, makes up 15% of your credit score).
Other companies, like Credit Karma, offer free credit monitoring services that alert you when there is evidence of fraudulent activity or when changes are made to your credit report. This can help you quickly spot discrepancies and dispute them with the credit bureaus.
It might also be worth hiring a credit counseling agency. These organizations hire certified professionals who can help you improve your credit. But make sure they are accredited by a major credit counseling organization like the National Foundation for Credit Counseling (NFCC).
According to Experian, a credit card payment overdue at least 29 days past its due date can stay on your credit report for up to seven years. You can ask your bank or lender to remove the late payment for you, but they don’t have to. And anyone who says he can make it go away faster is probably a con artist.
“In almost all of these cases, the tactics they use are questionable and could actually get you in trouble,” said Bruce McClary, senior vice president, Membership and Communications at the NFCC.
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