A credit score determines someone’s creditworthiness. A credit score is a number between 300 to 850. The higher the credit score, the better the score. Higher scores make the borrower look more attractive to potential lenders. So, there are many reasons to improve your credit score in 2021.
Here are a few items that credit scores are based on:
- Credit History
- The number of open accounts
- The total levels of debt someone has
- Repayment history
- The amount of hard inquiries on your credit report
Improving one’s credit score can seem daunting at first, but it is easier than it seems. Let’s talk about the simple ways that you can improve your credit score in 2021.
Set Up Automatic Bill Payments
One of the most important factors when it comes down to your credit score is your payment history. Setting up automatic bill payments will help you skip the effects of missed payments on your credit score. But you do have to make sure that you have enough money in your checking account to pay each bill each month in order to avoid an overdraft. Not having to deal with a sudden credit score dip due to a missed bill payment leaves more time to focus on other ways that you could improve your credit.
Join a Trusted Individual’s Account as an Authorized User
Not only does your credit card payment history show up on your credit score, everyone’s credit card payment history in which you are an authorized user on the card shows up on your credit score. As an authorized user, you can use the card to make purchases. Make sure to pay the individual back whose card it is since they are the primary owner and therefore fully responsible for any balance on the card.
Due to all these factors make sure to pick someone who you trust, such as a family member or close friend, in order to make sure that this decision doesn’t affect your credit score in a negative way. It is crucial to pick someone whose credit you will actually benefit from.
Pay Down Balances on Debt
How much revolving debt you have is the second-most crucial component when it comes to your credit score. Your credit utilization ratio is how much revolving debt you have compared to your credit limit. Last year, in 2020, consumers saw a substantial reduction in credit card balances and that in turn reduced credit utilization ratios. This led to a record-high U.S. credit score average.
The best goal to have when reducing debt is to pay off high-interest credit card debt first. This is the case when you are paying more on these credit cards in interest than you would be paying on a federal student loan or any other type of loan. When you decrease your credit card balances, you show potential lenders that you are responsible with your credit.
The experts suggest that you keep your credit utilization ratio below 30% of your credit limit. The people with the highest credit scores have a utilization ratio in the lower single digits.
Keep Old Credit Card Accounts Open
It is best to keep old credit card accounts open, even if you are no longer using them. Your credit score benefits from a long credit history and a high total credit limit. When you close an established account, you shorten the average age of your credit card accounts and that lowers your total credit limit.
The effects of your utilization rate are immediate on your credit score. But it takes years before an account that was closed in good standing drops off your credit report.
Pay Off Credit Card Balances Every Month
A great way to keep credit utilization low is to zero out your credit card balances each statement period. This is a great way to strengthen your credit.
Make it a goal to minimize ongoing debt by paying off your credit cards each month. This way you’ll also avoid any incurring interest charges that come with your monthly bill.
Track Your Credit Score
Taking personal responsibility and tracking your credit score helps keep your credit score high. When you realize that your credit score drops, you can quickly intervene. You can address any factors that influence your score swiftly. This can include high debt balances, late payments, or too many hard inquires.
The best option is to use a free program that checks and monitors your credit score. That report gives you a look into your credit score.
Limit Your Loan Applications to a Short Time Period
When an individual applies for a new credit card or loan, a hard inquiry appears on your credit report. This could possibly lead to a brief dip in your credit score. Multiple hard inquires could be an indication to lenders that someone is searching for lines of credit that they won’t be able to pay off.
Smart borrowers will apply for a few loans that fall into the same category in order to compare rates between the loans. The credit scorers treat multiple hard inquires that were issued around the same time of the same loan type as one inquiry. So, it is smart to submit loan applications within a short time frame.
Add Diversity into Your Credit Mix
Lenders like to look for a mix of accounts in an individual’s credit file. This shows that you can manage multiple lines of credit.
These could include:
- Installment loans
- You pay a fixed amount per month
- Revolving credit
- Comes with a limit that you can choose to charge up to
- Example: credit cards and home equity lines of credit
- Comes with a limit that you can choose to charge up to
Only having one type of credit in your file could make your credit mix suffer. Therefore, lenders are less likely to give out their money to you. The greater you look to a lender, the greater your credit score is. The lenders only want to lend out to the best.
Are There Any Risks That Come Along with These Tips?
When adding diversity to your credit file, don’t just apply to different types of credits just to improve your credit score. In doing so, you are putting yourself at risk of taking on debt that you can’t repay. Make sure you have the means to take on different types of credit before doing so. Otherwise, your credit score could suffer.
Do not put your name on any credit card or any other person’s credit card that you cannot completely trust. If a credit card company seems sketchy, then steer clear. By engaging in that company, you are putting yourself at risk of dipping your credit score or identity fraud. If you do decide to join an account as an authorized user, make sure it is someone that you can trust. In this case, what happens on their credit card, directly affects your credit score. Make sure that it is an improvement.
What is the Ultimate Way to Increase Your Credit Score Easily?
To increase your credit score in the easiest way possible, you need to create a budget. A budget keeps your spending in check in the long term and helps you keep track of paying off debt.
The process of making a budget provides clarity on the amount you are spending on each item and if it is necessary. Creating a budget helps an individual make smarter decisions when it comes to using a credit card and their money in general.