When it comes to money and borrowing, having a good credit score is one of the most important things you can do to maintain financial health. This three-digit number is a tool that lets lenders assess risk and know how likely you are to pay back loans. Because of this, your credit score will be a determining factor in whether or not you can take out a personal loan or mortgage and what kind of rates you’ll get on those loans.
According to Experian, one of the three major consumer credit reporting agencies, 26% of people have either poor or very poor credit. And if you live in Texas, statistics aren’t on your side, either. The state has one of the lowest credit score averages in the country.
Luckily, your credit score isn’t a permanent number. If it is currently less than ideal, you can raise your credit to a good or excellent score with some determination and dedication.
How a Credit Score is Calculated
If you want to improve your credit scores, you must first understand how they are calculated. While different scoring models exist, they all take similar factors into consideration. These factors can include:
- Payment history;
- Type of credit that you’ve taken out;
- Length of credit history;
- Your debt-to-credit limit ratio;
- How much debt you have;
- Open credit applications.
How to Raise Your Credit Score 200 Points
Here are Amplify Credit Union’s best tips and tricks for raising your credit score by 200 points and keeping it healthy for years to come.
Check Your Credit Report
One of the first steps to repairing your credit score is to ensure that it reflects you and your financial history. Incorrect information on credit reports is one of the top complaints received by the Consumer Financial Protection Bureau. One study revealed that 1 in 5 people had an error on at least one credit report. Errors can affect your score and make you appear to be a risky borrower. This can, in turn, hurt your chances of obtaining credit or end up costing you more money.
Common mistakes to look for include:
- Personal Info Errors. Check for wrong names, addresses, and phone numbers. Make sure that all accounts listed on the report are, in fact, yours. If you have been a victim of identity theft, you might find accounts that do not belong to you.
- Balance Errors. Verify that all balances and credit limits listed on the report are correct.
- Errors in Account Status. Ensure that the reports are accurately reflecting the status of your accounts. For example, you may find inaccuracies related to overdue and delinquent payments or closed accounts reported as open. You’ll also want to double-check that each debt is only listed once.
If you do find an error, the next step is to contact the credit reporting company to file a dispute. You can also file a dispute with the organization or company that supplied the information to the credit reporting bureau.
Pay Bills on Time
Secondly, you’ll want to pay all of your bills on time. Payment history makes up a large part of your credit score— after all, lenders aren’t going to want to loan their money to someone who has past issues with not paying back what they borrow. If you have a poor track record with late and delinquent payments, consider taking the following steps to ensure it doesn’t happen in the future:
- Budget Your Money. Make sure you have the money every month to pay any bills. Construct a budget that correctly allocates your income to making the necessary payments and reducing debt.
- Set Up Auto-Payments. Sometimes we make late payments simply because we forget. To avoid this, set up auto-pay on as many accounts as you can. You should still check in on your account every month to ensure monthly payments are going through correctly.
Paying your bills on time for one or two months won’t fix years of poor payment history, but it’s a great place to start and an essential step in building your credit back up.
Pay Down Debt and Maintain Low Balances
Since a poor debt-to-credit ratio can affect your credit score, it’s important to pay down student loans, auto loans, or whatever other obligations you have. If you have any revolving credit accounts like credit cards, try and keep your balances to a minimum. This task can be one of the most challenging aspects of boosting your credit score, especially if you have a large balance to pay off. Still, it’s vital if you want to raise your credit score by 200 points.
Not only does the amount of debt impact your credit score, but so does that number compared to your credit limit. When determining your likelihood to pay back a loan, lenders prefer to see a small debt-to-limit ratio, which is the amount you borrow over the total amount of credit that is available to you. Low utilization ratios show that you responsibly use your credit.
Because of this consideration, increasing the limits on your credit can boost your score. For example, if your credit limit is $1,000 and you use $200, your utilization is 20%. However, if you increase your credit limit to $2,000 and still use $200, the utilization rate is only 10%. Just be careful that when you raise your limit, you don’t increase your spending as well.
Explore Secured Credit Cards Instead of High-Interest Cards
The type of credit that you have is less influential on credit score than payment history, but it’s still a factor. Debt with high-interest rates such as traditional credit card debt appears to be riskier than other forms of debt like loans or secured credit cards. Consider consolidating your credit cards or paying them off with a personal loan that has more favorable terms. This approach can also save you money if your new loan has a lower interest rate.
Once you pay off those credit cards, don’t cancel them. That’s right— leave them open. This tactic goes back to that credit utilization factor we talked about earlier. If you have credit available but don’t over utilize it, it helps your credit score.
Once you have a handle on your debt, a secured credit card is a good option for building a solid repayment history. It will also ensure that you don’t spend more than you can afford to pay back.
Limit Credit Inquiries
Each time you apply for a loan, mortgage, or credit card, lenders make what is known as a “hard inquiry” into your credit score. A high number of hard inquiries can be a red flag and cause your credit score to decrease, so you’ll want to limit your overall number of credit accounts.
Other organizations - like utility companies, employers, and landlords - may also make a credit inquiry. However, these are known as “soft inquiries” and don’t affect your credit score.
Negotiate with Lenders
If collection agencies have bought your debt, there’s a chance that you’ll be able to negotiate your balance. Lenders may be looking to recoup any money they can get, and compromises may be possible.
Raising your credit score by 200 points won’t be easy or happen instantly. But don't lose hope: it is possible with some smart money moves, a little bit of diligence, and a whole bunch of patience.
Originally published on December 2, 2019.