The world of credit is confusing to many people. This is why so many people end up with massive amounts of debt. You don’t want this for yourself. Your credit score is the story of your credit history. Financial institutions won’t want to lend you money if they see a pattern of unpredictability. Here are five ways to improve your credit score, and why it’s important.
Don’t Max Out Your Credit Cards
Say you have a credit card. It has a monthly limit of $3,000. Every month, you put at least $2,000 on the card. As long as you pay it back, you should have perfect credit, right? While that might seem logical, it isn’t exactly the way of credit scores. Credit agencies use something called credit utilization to determine your credit score. Essentially, credit utilization is the percentage of your available credit you use every month. It’s suggested that your credit utilization shouldn’t exceed 30 percent. That would be $900 for a $3,000 limit. This is a sign to credit reporting agencies that you don’t mindlessly spend your money.
Consider Paying Twice Per Month
This point goes along with the previous one. You can’t be entirely sure when credit reporting agencies will look at your outstanding balances. Depending on how much you’re spending, it might be smart to pay off your card twice per month. By doing this, you’ll be less likely to be over the 30 percent credit utilization threshold at any given time.
Again, even if you consistently pay off your whole bill, your score might suffer due to high credit utilization. And if you have a low credit score, your finances will suffer in other ways. It will be more difficult to get loans—even with less attractive conditions. It can also affect your insurance costs. Try to compare car insurance rates to see how your credit score might be hindering your premiums.
Always Pay on Time
Late payments are not your friend. Payment history accounts for about 35 percent of your FICO score. FICO is a company that specializes in predicting consumer behaviors. They have developed a score that helps lenders determine the likelihood of future outcomes. If you have missed payments in the past, that’s going to count against your FICO score.
Think of it this way: Would you want to lend money to someone who has a history of not paying it back? Probably not. Banks and lenders don’t want to do that either.
Raise Your Credit Limit
Another way to improve your credit utilization level is to raise your credit limit. There are a few ways you can do this. First, you can request that your credit card company raises your limit. If you have a solid history of paying on time, it’s likely that they will be okay with this. You can also open up more lines of credit. Reporting agencies include all open lines of credit when determining credit utilization. So if you have multiple cards, you can just spend a little bit on each of them. It’s important to note that you need to have some restraint if you pursue these options. You can’t just adjust your lifestyle to spending more once you get more credit. This will raise your credit utilization back to previous levels.
Become an Authorized User
This option isn’t going to be available to everyone. Authorized users are allowed to have a card in their name on someone else’s account. This is an easy way to build your credit, as it raises your limit. Just make sure you’re extra responsible if you’re an authorized user. You won’t want to cause any problems for the person generous enough to help you out so much.
There’s nothing fun about credit scores. Fortunately, they don’t have to be so intimidating if you understand what affects them. Try to improve your credit score by implementing some of these techniques.