How to Increase Credit Score

What does your credit score mean to you? Before you answer that, consider that these are only three digits. That’s it, just three that are linked together and attached to you.

That score allows creditors and lenders alike to determine if you’re a pleasant surprise, a sure-fire thing or someone they’ll be skeptical of when it comes to borrowing money.

That is just a small piece of what your credit score should mean to you.

Credit scores dictate quite a bit in the realm of the financial world, from the aforementioned example of whether you’ll even be allowed to borrow money, to what your interest rates will look like, and if you’re financial status overall is on par or exceeding expectations, rather than following woefully short.

The good news for the average consumer is the credit score is on the rise in recent years, hitting the 695 mark in 2015; 695 falls in the “average to fair” range with 720 and above considered excellent by credit score standards.^[1]

While some credit scores leave a lot to be desired and can flirt with the 300 to 400 range, most fall within the 600 to 750 range, suggesting that, for the most part, credit scores actually do mean something to the general public.^[2]

As well as the masses are doing with credit and scores recently, you’d think that all is well, and no further attention to the matter would be necessary. Even FICO, one of the top credit scoring analytical companies, said that as of 2017 the average score as far as they’re concerned hit 700.^[3]

That said, credit scores often are overlooked and bump up against better judgment when it comes to taking out a loan that you don’t need, having far too much debt or the always important debt to income ratio.

Other factors that could potentially harm your credit score are the balances you carry on credit cards or lines of debt in comparison to what the actual limit is.

Whether you’re overspending and charging your way through the holidays or have a major home repair that is going to consist of you borrowing money, often times emergencies or unplanned spending that one would deem paramount is putting a damper on your score.

Furthermore, if you’re someone who fails to budget properly and put money aside for those “rainy days” of sorts, you’ll continue to amass more debt, lower your score, and the next time you’re in line to borrow money, you may get an astronomical interest rate or, worse yet, turned down entirely.

Those who flaunt and boast a credit score that is in the good to excellent range argue that it isn’t by accident. Your credit score doesn’t magically exist on a high level without putting in the effort to maintain it, and that is rooted in decision making that is smart, and truly understanding these tips and moves you should be making (or in the midst of) to ensure your score ranks as one of the better ones.

Balancing act: Watch how much debt you carry versus limit

Whether anyone cares to admit it or not, the United States has a credit problem.

Plain and simple: we borrow too much, and that goes for the average person, too.

The average household has a credit card balance of $9,100, a staggering figure if you consider that sort of debt can’t be tied back to anything tangible, for the most part, such as a car loan or mortgage.^[4]

A big part of credit card debt that affects your credit score is utilization, which monitors your balances as it relates to your total credit limit.

If you’re carrying a $5,000 balance on a credit card and the limit is $5,000, your utilization obviously would be considered poor. In this case, a credit utilization of 100 percent is not a good thing.

A good utilization rate is anything 30 percent or lower.^[5]

That would mean that same $5,000 limit on a credit card would need to have a balance of $1,500.

In order to get credit utilization in line, you have to work to pay down debt, plain and simple. Often times, those who are balancing and trying to pay and maintain multiple credit cards use the method of making minimum payments on all the cards, except the one with the smallest balance. They’ll pay a little more on that, and then once it gets paid off, whatever was being paid to that card goes toward the next highest balance. This shows progress and tends to be arguably the most successful way to tackle debt with a game plan in mind.

Another short-term fix to help with credit utilization might seem odd at first but when you consider how it’s calculated, it makes sense, and that is to ask for a credit increase. If that $5,000 balance on a $5,000 limit card suddenly goes to a $10,000 limit card with an increase that was approved, your utilization is cut in half.

Income sensitive: Debt to income ratio can’t be overlooked with score in mind

Debt to income ratio is easy to understand when you consider the two main components.

If you have a lot of debt, and that debt equals high monthly payments that rival your monthly income, you’re not in the best of financial situations.

This belongs on the credit score list of what you should be watching, even if it isn’t directly related to your credit score.

That said, when a lender looks at the entire scope of your financial well being, this formula and percentage means a lot in determining your risk as a potential borrower.

As stated, your debt to income ratio doesn’t look at your entire income versus entire debt in totality but rather on a payment basis. If you have payments that equal $4,000 per month, and you earn $6,000 per month in income, your debt to income ratio is 67 percent.

What’s considered a good debt to income ratio is right at the 36 percent mark, although one as high as 43 percent would be tolerable when it comes to assessing your credit, albeit not a desirable mark.^[6]

This is a little tougher to crack since your debt is what it is, and if you were able to pay it off or even lower it, chances are you would have done that by now. Increasing your income is always an option, even if it’s about landing a part-time job to give you that much more flexibility.

Many point to their troubles with debt to income ratios with the inflation of cost of living versus the salaries not being able to keep pace.

A recent study showed that cost of living is up 30 percent since 2004, with a 28 percent increase in how much we make, coupled with certain expenses skyrocketing in that same time period (particularly a 57 percent hike in medical expenses since 2003).^[7]

You could argue that plays into the amount of debt versus the income not being able to stay at 36 (or 43) percent, but it also boils down to adjusting your cost of living, and living beneath your means so that saving money is a viable option, even if incomes are down across the board.

Timing is everything: Don’t pay your bills late, or your score suffers

If you’re all too familiar with the phrase “grace period” as it relates to how you pay bills, this credit score misstep should pique your interest.

The most overlooked and ironically easiest way to manage and increase your credit score is to simply pay your bills on time, observe the due date and certainly don’t let anything go back 30 days due.

When it comes to your credit score, paying on time is arguably the most important aspect of it.

Timely payments make up 35 percent of your credit score, and late payments can drop your score as much as 100 points or more, particularly if you miss a payment entirely.^[8]

The 30-day window really is the one, if nothing else, you pay attention to closely. After 30 days has come and gone, the credit card companies, mortgage company or the institution you have your car loan through, for example, will report these to a credit agency, and that’s when the real damage is done to your score overall.

The alarming statistics about delinquencies suggests that we’re continually rising in the percent of individual who are allowing payments to go beyond 30 days, with most clinging to the silver lining that it is still below the 15-year average, for instance.

Looking at numbers from 2016, credit card delinquencies were up in the fourth quarter of that year nearly 13 percent with a rate of 1.79, but that rate is well below the high in 2009 of 2.97, with a staggering 64.4 percent of collection agencies collecting on old medical debt (35 percent for credit card debt).^[9]

Those increases are anything but slight and raise concern about individuals either paying late or ignoring payments altogether (and that would seem directly related to medical more than anything).

Defiance by consumers to not want to pay on time could suggest difficult paying debt in general and thus would rather allow debt to pass that late payment time period and well into that 30 plus day window where it negatively affects credit.

In those situations, you’d be better served to search out financial help or debt consolidation as long as the latter gives you better interest rates than what you’re currently paying.

In the end, paying on time should be of the highest priority, even if that means cutting out other expense from your already existing budget.

Understanding the importance of a good credit score typically isn’t lost on most.

They get the fact of how much that number means, but the problem with credit scores is they fall into more of an “out of sight, out of mind” mentality for some.

Think of it like this: you see your bank account often. You monitor your checking and savings balances because paying bills is a month to month business. Buying gas, groceries and other necessities are on a day to day basis.

But your credit score stands as the forgotten piece of your financial future in the sense that you only find concern for it when it comes time to buy a house, car or finance a project, or even just the simple act of opening up a credit card.

The moment you are turned down for a loan or told that an interest rate of 3.99 percent is going to be closer to 10 for you is when that credit score holds value. Bad purchases, racking up credit card debt and buying and positioning “wants” over “needs,” along with not keeping a budget suddenly seem like all the wrong moves at that moment mixed with dread and despair when you’re handed a hard and fast “no” from a lender.

In order to maintain good credit, and be able to enjoy those things at a fair and reasonable rate or just have the piece of mind to know that when those three digits look back at you all is well financially, you must track and keep both eyes on that score as if it were your bottom line worth.

Anything short of that suggests your score only matters when it’s holding you back, and by then, bad decisions may preclude you from any sort of positivity associated with anything from borrowing to interest rates.

That number should mean something to you all the time, not just when it suits you.