Improving your credit score is like trying to lose weight.
The principles are simple; putting them into practice, not so much. If you want to lose weight, you need to burn more calories than you eat. Sound simple?
Improving your credit score is also simple: check whether there are any errors in your credit report and build a good credit history by paying your bills on time every month.
Easier said than done, which is why in 2013 the average US household credit card debt was $15,270.
Many people fall for the promises of shady credit repair companies that claim they can boost your credit score instantly for a “small” fee. As with dieting, the quick-and-dirty fixes may be tempting–the beer-and-ice-cream-only diet is my all-time favorite–but, sadly, they don’t work.
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Here are 3 ways to improve your credit score:
1. Protect Your Credit Report
About 35% of your credit score depends on your payment history, so make your credit payments on time and ensure the data on your credit report is correct.
Your credit score is a lot like your reputation, the stuff people say about you doesn’t have to be true to hurt you. Credit scores are based on what banks and other creditors tell the bureaus about consumers. Most of the time they get it right, but sometimes they make mistakes.
It could be you’re the victim of identity fraud, or maybe creditors have confused you with someone else with a similar name or social security number. It’s also possible you and your lender disagree on how much you owe, or whether you were late on a payment.
Just a single error on your credit report could significantly drop your score, which in turn could increase your mortgage and credit card payments by hundreds of dollars throughout the year.
SuperMoneyTip: You’re entitled to a free credit report from all three bureaus every 12 months. A neat way to monitor your credit report for free is to request your annual free credit report from a different bureau every four months instead of looking at them all at once.
Check your credit report and score with tips from our article Paid Vs. Free Credit Reports.
If you find a mistake, write a letter to the credit reporting companies and request an immediate correction. You will usually need to provide evidence, so make sure you have the documentation to support your claim.
2. Pay Down Your Credit Card Balances
About 30 percent of your credit score is based on your debt-to-credit ratio. To calculate your ratio divide your debt by your available credit. For instance, if you have $10,000 in debt and $30,000 in available credit, your ratio is 0.3 or 30 percent. The smaller that percentage is, the better. Keep your ratio at or below 10 percent and your credit score will thank you.
SuperMoney Tip: High credit card balances will hurt your score even if you have the good habit of paying your credit card balances in full every month. That is because some creditors will report your monthly charges as your balance. Keep your credit card balances low by making several payments throughout the month, particularly after buying big ticket items.
3. Don’t Dillydally When Rate-Shopping
It is smart to shop around for the best rates when you need credit. The problem is that every time you apply for credit, the lender will perform a hard credit inquiry, which typically hurts your score.
This is because credit-score algorithms are built to view a search for multiple lines of credit as a red flag for credit overreach. Algorithms distinguish between a search for the best rates and trying to open multiple accounts by the length of time over which the inquiries are made. FICO scores, for instance, will count all the credit checks made on your report in the last 30 days as a single inquiry.
SuperMoney Tip: Get your ducks in a row by researching which are your best credit options before you file a loan or credit card application. Then send in all your applications within the same month.
Simple, but not quick and dirty
If you’re disappointed these tips don’t include a faster trick to boost your score, I feel your pain. I was also heartbroken when my beer and ice-cream diet failed to deliver the promised results. The thermodynamics science behind it seemed so logical!
The good news is that you can build a good credit score for yourself and enjoy the financial benefits it brings by following three simple principles: fix any credit history errors, pay your bills on time and keep your credit balances low. Easy, right?