A good credit score can help you get approved for better interest rates on your loans, credit cards, and mortgages, as well as save you money on insurance premiums and even get you approved for a job. But the road to that perfect 800 isn’t always easy, especially if there are specific areas of your credit history where you have struggled. That’s why it’s important to know which of your accounts are hurting your score and what you can do to improve your rating overall.
Knowing Your Risk Factors Can Help You Improve Your Credit Score
If you’re looking to improve your credit score, it’s important to know where you might be putting yourself at risk. If a creditor is considering whether or not to extend you a loan, they may consider factors such as your income and other assets, but they also look at other parts of your life. Creditors may check into how well you manage what you already have, which can impact their decisions about whether or not to extend additional credit.
Sometimes, however, the factors that are impacting your credit score negatively may not be so easily identified. For example, even if you always pay on time, your balances may be too high, or you may not have sufficient credit history.
Each of these factors can be improved. Take a look at your credit reports and find out which accounts may be hurting your score, then create a plan to reduce them. For example, if you have too many open lines of credit, consider closing some of them. If you have too many delinquent accounts on your report, ask creditors to update them or close them and try again in six months.
Steps to Improve Your Credit Score
If you want to find out which accounts are hurting your credit score, ask for a free copy of your credit report from one of these three sources: Equifax, Experian, or TransUnion. These reports will detail all your accounts, payments, and outstanding debts, so you can know exactly where you stand. Then take steps to get back on track if there are negative entries on your report that don’t belong.
Although knowing your risk factors is key to improving your credit score, there are a few things that anyone can do to increase their scores:
Make on-time payments: Pay your bills in full and on time. Late or missed payments will hurt your credit score. As a rule of thumb, try to pay all your bills as soon as you receive them.
Avoid closing accounts: Keep open bank accounts, utility services, cell phone contracts, and other debt obligations that appear on your report. Even if you don’t use these accounts anymore, keep them active to show lenders that you can responsibly manage more debt.
Increase available credit: This is a strategy for those who have good borrowing history but small amounts of available credit—such as someone with only one credit card that they use sparingly. Instead of closing an old account, ask your current creditor to increase your credit limit so you can start using more of your available credit on loans or lines of credit. If that doesn’t work, apply for another account.
Get new loans and lines: Apply for a new auto or personal loan and take out new lines of credit to increase your total available credit. Applying for several smaller accounts will also help you open up new accounts that report positive payment history to the three major reporting agencies. This strategy is only useful if you can pay off any debts on time—but it’s still important to show that you’re responsible when handling more debt. Create individualized strategies for each account on your credit report. Individualize specific strategies for each negative entry, depending on how long it’s been active, whether payments are current, and what kind of account it is (e.g., mortgage versus store card). If an entry is old, consider paying off any balances on outstanding balances to remove an entire negative entry from your record. Also, make sure all your accounts have positive payment history attached to them; filling out a thin file with recently opened lines of credit can be just as effective as paying off old debt.
Don’t chase good or chase bad: Sometimes we think that closing one bad account will improve our score since there is less bad information on our reports. However, don’t close an old account if it doesn’t have a high balance and has a strong payment history attached to it. Also, don’t open new lines of credit if you can’t pay them off each month—this creates new negatives when debts become due and won’t help your scores in any way.