It’s no secret that credit, especially good credit, is essential for most major purchases, like a car, a house, and even utility services.
Unfortunately, with only 17 states requiring high school students to take a personal finance course, the importance and even definition of credit is not something that many learn about early enough. Without the proper financial literacy knowledge, it’s much too easy to damage your credit once credit card offers start rolling in during your late teens and early twenties.
While it’s important to build your financial foundation the right way, fortunately, it’s not impossible to repair your credit if you’ve dug yourself a bit of a credit hole.
Here are 6 ways to boost your credit score that you can use at any time in your financial life.
6 Ways to Boost Your Credit Score
1. Have a Goal in Mind
Before you can focus on boosting your credit score, you need to determine how much you want to increase it. The highest credit score you can have is 850. Of course, a perfect credit score may be a good goal, but it isn’t essential for getting the best interest rates. Regardless, as with any goal, it’s best to start small.
To set short-term goals, you should know the different credit score ratings. The information below will help you determine what a good credit score is and what to aim for:
- Excellent: 750+
- Good: 700 – 749
- Fair: 650 – 699
- Poor: 550 – 649
- Bad: 550 or less
As you can see, each credit score rating has a fairly significant range. As previously mentioned, you don’t have to have a perfect credit score to be offered the best terms on loans, but you should strive for a score in the “good” range at a minimum.
Additionally, rather than focusing on a specific number, make it a goal to increase your score to the lower or higher end of the next range. For example, if you start in the mid 600s, aim for the lower end of the “fair” credit score rating. Once you reach that goal, aim for the mid or higher end of the “fair” rating, and so on.
If you aim for a specific number, you may feel defeated at the end of the timeframe you’ve established if you haven’t met those three magical digits. Remember to be realistic and give yourself time.
Also, remember that a perfect credit score isn’t the goal. In fact, once you’ve hit the “excellent” range, you’ll be offered the best terms and interest rates regardless of where you fall within that range. Thus, once you’ve increased your credit score to the “excellent” range, there isn’t a need to continue to focus on increasing it. Just make sure to continue to do what you did to get into that range to maintain your excellent credit.
2. Pay Your Bills on Time
We cannot stress this point enough. Paying your bills on time has a huge impact on your credit score.
Most lenders determine credit health based on five major factors, and the weightiest component is payment history. Whether you are looking to boost your credit score or maintain it, one of the best things you can do is make it a goal to pay your bills before any non-essential expenses.
We all look forward to payday, but before you “treat yo self,” you need to prioritize your responsibilities. Most companies will waive a one-time late fee, but if it becomes a habit and you get behind on bills, your credit score will be impacted.
If you tend to be forgetful or want to ensure that bills are prioritized, consider setting up automatic payments. Once you set it up online or over the phone, you don’t have to worry about late fees, and the money will come out of your account before you can spend it on other things.
Some may shy away from autopay because they worry about not having enough money in their account. If that is a concern for you, the first thing you should do is re-examine your budget to make sure all relevant budget categories are accounted for and make necessary adjustments. You might also consider setting the due date for all of your payments on the same day. Each month you will know exactly how much money will be taken out of your account and on what day, and you can plan accordingly.
Remember, too, that paying off existing debt is just as important as paying your bills on time. So, if you already have loans, make sure you’re meeting the minimum required payments each month and try to develop a payoff plan strategy over time that you can manage.
3. Keep an Eye on Your Credit Usage
How much of your available credit you use can also affect your credit score.
A general rule is to keep your credit utilization at or under 30%. This means that if you have a credit card with a credit limit of $5,000, you wouldn’t want to carry a balance of more than $1,500 (or 30%) at any given time. If you are looking to boost your credit score, you should aim to stay below that 30% percentage mark on your available credit.
That doesn’t mean that you should necessarily avoid using credit altogether. Zero percent credit usage doesn’t necessarily help you boost your credit score either. Part of building credit is demonstrating that you can use credit responsibly, so carrying a small balance and paying those balances off every month is best practice. You’ll find that there is a right way to pay your credit cards.
One small trick to manipulate your credit utilization is to request an increase in your line of credit. A credit-limit increase will automatically reduce your utilization, which will improve your credit utilization ratio. Just make sure an increase in credit doesn’t lead to an increase in spending and debt.
You want to build credit, but you also want to be strategic about using credit and not necessarily relying on credit for everything. For instance, most people who want to buy a house will need to take out a mortgage. It’s pretty uncommon for anyone to buy a house with cash these days. In fact, as of 2019, only 16% of home buyers used cash to purchase their home. Housing is necessary, so taking out a mortgage to purchase a home may well be included in your list of credit expenses.
However, there are some things that you should avoid using credit for, like impulse splurges. So, you can take Jay-Z’s opinion about not being able to “afford something unless you can buy it twice” with a grain of salt, but try not to live beyond your means.
4. Use Different Forms of Credit
Another way to boost your credit score is by varying the types of credit you use, although you shouldn’t necessarily take out different types of loans simply to boost your credit score.
There are three kinds of credit: revolving, installment, and open accounts. Aim to use all three if it makes sense for your situation. Doing so will enhance your credit mix. However, before you can vary your credit, you need to understand each type.
Revolving: Credit cards are an example of revolving credit. Credit cards are probably the most commonly used type of credit because you only have to pay a minimum amount of the balance each month, and many use them in a pinch if money is tight. However, you should try and avoid carrying balances on your credit cards and paying unnecessary interest. You may already have one or more credit cards, but it doesn’t hurt to research the different types and see if there are any that better suit your needs. If you’re able to pay your balances each month, rewards credit cards can be a great way to make credit cards work for you.
Installment: Installment credit includes all loans, like mortgages, auto loans, and personal loans. Installment credit differs from revolving credit in that you are required to pay a certain amount of money each month, with no minimum option. Unlike credit cards, the timeframe for paying back a loan depends on the terms of the number of months you have agreed to. Loans typically come in handy for larger purchases that a credit card is not ideal for, like a home project or car. While mortgages and auto loans have fixed purposes, there are many types of personal loans that can be used for just about anything.
Open accounts: Open accounts refer to things like utility bills or phone contracts. The amount you owe may vary from month to month, and there is no interest. Unless you are a chronic late payer or have outstanding debt in the form of open credit, it is unlikely that it will show up on your credit report. However, these bills can go into collections if you’re not careful. So, pay them on time or work to establish a payment plan with the biller.
As mentioned, it doesn’t typically make sense to take out loans just to get different types of credit on your credit report. However, if you have bad credit and are looking to boost your credit score, it may make sense to take out a credit builder loan specifically for increasing your credit score by building a history of on-time payments without actually buying anything.
5. Avoid Hard Inquiries
There are two types of inquiries that can be made into your credit: hard inquiries and soft inquiries.
Soft inquiries are “those that are not performed by a potential lender.” They include things like preapprovals, employer background checks, and self-initiated credit checks. Soft inquiries can be done at any time and have no impact on your credit score.
Hard inquiries are the ones to be cautious of. These are performed by potential lenders for new loans or credit cards. Hard inquiries are not necessarily bad. In fact, they are necessary to be approved for various forms of credit. However, you want to limit how often you apply for new loans and credit cards because doing so can result in many hard inquiries in a short timeframe, which can be seen as a red flag.
Furthermore, hard checks will stay on your credit report for two years. It is possible to increase your credit score in other ways while a hard inquiry is still on your report, but if your goal is to boost your credit score, why complicate matters? In short, hard inquiries are inevitable. Be smart about how often you permit financial institutions to perform them by being thoughtful and planful when applying for new credit opportunities.
6. Be Mindful of Credit Age
Last but not least, credit age also plays a crucial role in boosting your credit score. Unfortunately, there’s nothing that you can do to speed up time, but you can focus on boosting or maintaining the other credit score factors.
Nonetheless, establishing credit as soon as possible can help build credit age. This is especially important for parents. While age eligibility for a credit card or a loan is 18, you can set them up with free debit cards while young and as an authorized user on one of your accounts to help them get established. Not only will doing so provide an opportunity to teach them about credit, but also things like money management and responsibility.
When they turn 18, they can start or continue building their own credit, and they will be at an advantage when it comes to understanding credit and how to use it to their advantage. You don’t have to shy away from allowing them to open a credit card or take out a loan in their name at the appropriate age. With the proper knowledge under their belt and assistance from you, they will be well on their way to boosting their credit score through credit age by getting started young.
Even as an adult, becoming an authorized user on a longstanding account can boost your credit score by increasing your credit history. Just make sure the account holder is responsible and won’t leave you holding the bag.
While you should strive to pay off loans and be debt-free, revolving credit such as a credit card does no harm if it isn’t used. Therefore, whenever you open up that first credit card, try to keep it open even if you don’t use it as it will likely be your oldest credit.
Moral of the Story
Boosting your credit score takes work. Equipping yourself with the proper knowledge can make the job less arduous.
While you may be eager to reach that 850 credit score, exercise patience and create smaller goals by focusing on credit ratings rather than specific scores. In doing so, you will experience more success and avoid feelings of discouragement.
Sometimes we are forgetful, and other times we may be impulsive. When it comes to boosting your credit score, it’s important to work hard to avoid those tendencies. By setting up autopay and possibly setting the same due date for all bills, you can ensure on-time payments, the most important aspect of your credit score.
You may be tempted to use credit freely, but doing so can come back to bite you. Seek balance and aim to keep your usage under 30% each month.
Credit cards are common, but not the only form of credit. To boost or maintain credit health, you have to mix things up. Grasp a firm understanding of revolving, installment, and open credit types. Then work to strategically decide how you will incorporate each kind into your credit usage.
New credit opportunities can be intriguing, especially when interest rates are low. But remember, with each new application comes the possibility of a hard inquiry. Do your research and choose wisely before applying for loans or credit cards.
The best thing you can do to preserve credit age is to maintain the other credit score factors. Parents, do the work now to prepare your children for long and successful credit histories.
We’ve outlined just 6 ways to boost your credit score. Do your best to put them into practice, and be sure to research additional ways to boost your credit.