There are steps you can take right now that may boost your credit score, which can make it easier to rent an apartment, buy a house, or get a loan.
One of the best things you can do for your financial health is build a strong credit score, which is sometimes referred to as VantageScore or your FICO score. If you’re thinking about buying a house, renting an apartment, or applying for a loan to pay for school or purchase a car, a good credit score may help you borrow money on more favorable terms and a lower interest rate.
What’s considered a good credit score?
Most mortgage programs require a credit score above 620. The best rates and pricing are generally available to those with scores of 740 or above. Those with lower scores may have to pay slightly more to get the lowest rates available or be willing to accept a slightly higher rate. Those with scores below 700 still have options, but might pay the most to obtain the lowest rates available.
Steps you can take now to improve your credit score
Fortunately, if your credit score needs a boost, there are things you can start doing now to help increase it:
- Get copies of your credit reports — To know where you’re going, you need to know where you’re starting from. You can order copies of your credit reports from the three major credit bureaus — Equifax, Experian, and TransUnion — at annualcreditreport.com for free. These list your various accounts and your history of paying these on time. Review this information carefully; if you find mistakes on your credit reports, you have the right to dispute and correct them.
- Pay bills on time — Develop a track record of paying your bills on time. Late payments could stay on your credit report for as long as 7½ years. Payment history accounts for about 35 percent of your credit score calculation, making it the single most important determining factor. If you can’t make a payment within 30 days of its due date, call the creditor to explain the situation and arrange to pay the balance in full as soon as possible. They may be willing to not report the late payment to credit bureaus if you’re proactive.
- Pay down and pay off existing account balances — If you’re carrying a balance on an account, work to pay it off as soon as possible. Your first priority should be high-interest accounts, such as credit cards, which could be costing you extra money each month in interest payments. When you pay down your accounts, it also shows potential lenders you are responsible with credit and are accountable to pay back the money you borrow.
- Avoid making new credit card purchases — When you can, pay for something with cash rather than your credit card. When you make a purchase with a credit card, it raises your credit utilization rate, a factor that can account for about 30 percent of your credit score. As a rule, you want to keep your credit utilization rate under 30 percent. So, if you have a credit card with a $10,000 limit, you should aim to maintain a balance of less than $3,000 on the account. Again, it’s best to not carry a balance to avoid paying interest, so pay off account balances whenever possible.
- Leave old credit card accounts open — Having a longer history of credit may improve your credit score, so it can help to leave old accounts open. If you close an account, you may lose its credit limit towards your utilization rate, which could hurt your credit score. You may want to consider using old accounts occasionally to ensure the creditor doesn’t close it due to inactivity.
- Request credit limit increases — Most credit cards make it fairly easy to periodically ask for a credit limit increase on your accounts; some even allow you to make the request online. A higher limit lowers your credit utilization rate, which is the amount of credit you are using divided by the amount you have access to. Your utilization rate is one of the factors lenders use to calculate your credit score, so lowering it may help to boost your score.
- Become an authorized account user — If a family member has a good credit history, consider asking if they’ll add you as an authorized user to one of their accounts. This can be especially helpful if you’re just starting to build your credit history. You don’t even have to use the card to help improve your credit score. If you do, however, be sure to pay the primary account holder each month for your purchases, because they are ultimately responsible for any balance.
- Build a budget and stick to it — It’s always a good idea to have a budget, but it’s especially helpful as you work to boost your credit score. Plan your budget with your monthly bills and paying down high-interest debts as a top priority. This gives you a roadmap forward, and ultimately, peace of mind that you’re making progress toward building better credit.
- Keep new lines of credit to a minimum — Applications for credit cards or loans result in what’s called a hard inquiry on your credit report. Several inquiries in a short period of time may indicate an overdependence on credit and could cause a temporary drop in your credit score, so only apply for credit that you really need. Avoid applying for every credit card offer that shows up in your mailbox. Creditors may take that as an indication that you’re searching for credit that you might not be able to pay off.
- Remember that patience is a virtue — While these are all steps you can begin taking now, think of improving your credit score as an ongoing project. It takes time to boost your credit score because of the many factors involved. But if you develop a plan and are consistent, you’ll begin to see your score improve in the coming months and years.
Following some of these steps may strengthen your credit score, which could help you qualify for a better rate on your mortgage when buying (or refinancing) a home.