Your credit score reflects your financial health. It helps lenders understand how financially responsible you are with debt. A good credit score may make it easier to qualify for loans and credit products, such as mortgages and credit cards, and can help you get better interest rates and terms.
5 ways to improve your credit score
1. Pay bills on time
Your payment history is the single most important factor to improving your credit score. In addition to mortgages, credit cards and other loan and credit products, your payment history may also include certain accounts like phone bills, utility bills and even rent. Late or missed payments can lower your score.
2. Keep balances low
Your credit utilization ratio is the amount of available credit that you are using at a given time. For example, if you have a credit balance of $4,500 and the total credit limit is $10,000 from all your credit cards, the credit utilization ratio is 45%. A low credit utilization ratio helps improve your credit score. In contrast, a high credit utilization ratio may lower your score.
3. Have a longer credit history
The length of time that you’ve had credit products open can affect your credit score. Generally, a longer credit history can improve your credit score.
4. Avoid unnecessary credit applications
Your credit score can decrease slightly each time you apply for credit, such a new credit card or auto loan. This is also called a “hard inquiry”. The decrease is usually temporary, but some lenders may consider having many credit applications within a short period of time as a warning flag.
5. Have a mix of a credit types
Your credit score may improve if you have different types of credit products, such as a credit card, mortgage, and line of credit. However, you should only apply for credit when and if you need it.
Avoid the temptation to overspend
Credit can be a useful financial tool, but it must be used responsibly. Avoid overspending by creating a budget and only borrowing what you can afford to repay within a realistic time frame.