Your credit score is a three-digit number that determines a lot in your financial life. It can make the difference between getting the financing you need for major purchases, like a car or home. It can impact your ability to secure the apartment you want. And, perhaps most importantly, it determines how much borrowing money will cost you.
Lenders, landlords, and others look at your credit score to help them determine how creditworthy you are. In other words, they use this number to assess how likely it is that you’ll default on a line of credit or loan (or not pay it back at all.) A better credit score is evidence that you have made your payments on time and in full in the past, and that makes you less risky to the lender. They’ll usually reward that with a lower interest rate or a higher limit on your line of credit or borrowed funds.
But a lower credit score indicates you’re more likely to miss payments, make late payments or not make payments at all. Lenders see you as a riskier bet, and if they choose to offer financing, it will likely come with a higher interest rate, which means you’ll pay more for that financing over time. (For related reading, see: Things That Are Hard to Do With Bad Credit.)
Clearly, your credit score is important. So how do you hack it? Follow these five strategies to improve your credit score and secure a better interest rate on your next loan, mortgage or credit card.
1. Increase Your Credit Limit
One of the biggest factors determining your credit score is your credit utilization ratio. That’s the relationship between the total amount of credit you have available and how much you actually use. It’s expressed as a percent, and you should aim to keep your ratio at 30% or less. So if you have a credit card with a $1,000 limit and regularly charge $500 to the card, your ratio is likely sitting at 50%.
This can ding your score and keep you from improving it over time, even if you regularly pay off the card and don’t carry a balance or other debts.
If you’re financially responsible and use your credit cards wisely, but also find yourself using up a lot of your credit at one time, consider requesting an increase to the limits on your cards. This will give you more available credit and, as long as you keep your spending the same, a lower credit utilization ratio. (For related reading, see: 4 Common Credit Card Misconceptions.)
2. Use Your Credit Cards
That being said, a 0% credit utilization ratio can actually be worse than a high one. Back in 2014, Credit Karma found that users with a 0% ratio had lower scores than individuals who used 1%–20% of their available credit.
So don’t shy away from using credit cards entirely. They’re not bad or evil. They’re simply a tool in your financial toolkit you can use to help leverage your cash flow. Credit cards only become “bad” when you don’t use them responsibly, charge more than you can afford to repay to the card or let balances sit and accrue sky-high interest.
3. Don't Apply for New Credit Yet
You may feel like you can manage a new line of credit while you work to improve your score, but FICO might not agree. While working to give your score a boost, keep your credit situation stable. Don’t open new accounts or take out new loans. This will keep hard pulls or inquiries off your credit report.
A hard pull signals that you’re looking for new lines of credit, and credit bureaus file that on the risky behavior side of the credit spectrum. Whether you really are scrambling to find financing or just interested in a new credit card doesn’t matter, it’s how the bureaus interpret a hard pull. (For related reading, see: Credit Score: Hard vs. Soft Inquiry.)
4. Clear Your Credit Report of Errors
Have you tried all these hacks and nothing seems to work to improve your credit score? You could be weighed down by an error on your credit report.
Go to AnnualCreditReport.com every 12 months and request a copy of your credit report. It’s free to do this once per year (but if you need to pull your report more than once in 12 months, you’ll have to pay a small fee to do so). Review the report carefully and check for errors. If you find one, you’ll need to contact the credit bureaus and file a claim or dispute so they can fix the mistake.
5. Don’t Skip the Small, Simple Steps to Improve Your Credit Score
These tips and tricks can help you hack your credit score. But it’s also important you stick with the well-known, conventional action steps that are proven to help you improve your credit score over time.
Make sure you:
- Always make your payments on time and in full;
- Reduce your existing debt and make a plan to avoid future debts (even if it’s “good” debt, you may want to hold off while in the process of building up your score);
- Keep your credit utilization ratio under 30% and, ideally, as low as possible;
- Think twice before opening and closing accounts; doing so without a strategy or plan can ding your credit score for no good reason.
Ultimately, the best thing you for your score is also very simple. Don’t spend more than you can afford to repay on your credit cards, and avoid taking out loans you don’t truly need. When you do charge something to your cards or take out a loan, make payments on time.
This fundamental financial advice will help you keep not only a healthy score, but a healthy cash flow, too.
(For more from this author, see: How to Create a Budget You Can Actually Stick With.)
Securities and Investment Advisory Services are offered through Signator Investors, Inc., Member FINRA/SIPC, a Registered Investment Advisor. AspenCross Wealth Management is independent of Signator Investors, Inc. 1400 Computer Drive, Westborough, MA 01581