The three major credit bureaus — Equifax, Experian, and TransUnion — monitor and report your history of loans and the payments you make on them. Creditor pulls your credit to check out this history and use it as one of the determining factors in deciding how likely you are to repay a debt and if you're creditworthy enough for them. If your credit score is lower than you'd like it to be, there are several things you can do to work on improving it.
Protect Your Credit Score
Your credit score takes a minor hit when you apply for new credit. That doesn't mean you shouldn't apply for a new car loan or a mortgage; rather, you should proceed with caution before allowing a lender to pull your credit history. You can do the following to avoid taking too many hits on your score:
- Don't apply for multiple credit cards or personal loans. Figure out which works best for you and only apply once for the one that suits your needs.
- If you need a mortgage or car loan, try to have your credit run within 30 days. The credit bureaus realize that people need to shop around for these types of loans, and they only give you a single hit for multiple credit pulls within a short timeframe.
- Ask potential creditors if they can perform a "soft pull" on your credit rather than a "hard pull." Soft pulls are performed when you or an entity view your report for purposes other than extending credit and don't affect your credit score.
In addition, you can protect your credit score by monitoring your credit report. Each credit reporting bureau gives you a free credit report once a year. You can use these reports to ensure everything in your report is accurate and dispute whatever isn't.
Pay Down Your Outstanding Debt
The algorithm that helps determine your credit score is complex, but one known factor is how much debt you have compared to your credit limits. If you use a high percentage of your available credit, it will lower your score.
Say you have a $10,000 limit on a credit card and use $6,000. The best thing to do is to pay it off in full. But what if you can't? Try getting the balance below $5,000, so you're using less than 50% of your available credit for that card. Then push to get it below $2,500, so you're below the 25% threshold. The lower your percentage of usage, the better off your score will be.
The same applies to your overall credit limit. If all of your credit cards and other loans have a combined limit of, say, $100,000, look at that number and try to keep the total of your outstanding debt to a low percentage.
If you're about to apply for a loan, it might be worthwhile to wait as you pay down some bills, so your credit score is higher when the lender checks it. The change in score should happen within a month.
Keep a Mix of Different Types of Loans
The credit bureaus look favorably on a history that has a mix of loan types, such as:
- Car loans
- Mortgages
- Student loans
- Personal loans
- Credit cards
- Other revolving credit
While it's not a good idea to borrow money if you don't need it, there are situations where you can boost your score by adding a new credit type. For example, getting your first credit card to add to the mix might be worthwhile if you have a mortgage and a student loan.
Don't Cancel Old Credit Cards — Use Them
Another factor that affects your score is how old of a history you have. Therefore, you shouldn't cancel any old credit cards you no longer use since they might extend your credit history by several years.
Another advantage of older or unused credit cards is that they increase your overall credit limit. Canceling an old card will reduce that limit and increase your debt percentage.
Also, as mentioned, having a mix of credit types is healthy for your credit score. If you only have one card, you should hold on to it, so you don't lose that credit type.
You should swipe these unused cards occasionally since lenders cancel inactive accounts eventually.
Patience Is a Virtue
Getting your credit score up is certainly doable, but it takes time. Follow the above tips, and you'll see a steady increase in your score. Sooner than later, your score will get high enough to make you a desirable client for lenders.