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Improving Your Credit Score 101

While most people know that having a good credit score can save you money, there are many misconceptions about the best ways to improve it. Beware of companies that offer ‘credit repair’ services for a hefty fee. Instead of wasting your hard-earned money, take these steps instead.

1. Start with checking your credit report. You can check your credit report from the three major reporting agencies for free once a year through AnnualCreditReport.com. Or sign up for a free account with Credit Karma. Review your credit report for any errors and omissions. If you have a negative mark that isn’t rightfully yours, dispute it to get it removed. If you have an account that’s not included on your credit report, request that it be added.

2. Pay off any small balances. One factor that affects your credit score is the number of credit cards with balances. If you have multiple cards with small balances here and there, pay those off. This will reduce your total debt burden and improve your score relatively quickly. Going forward, pick 1 or 2 cards as your go-tos, and just use those, especially if they offer rewards—and if you can pay them in full each month. Contrary to popular belief, carrying a balance on your card does not improve your credit score. An outstanding balance actually lowers your score, and costs you interest to boot.

3. Request a credit limit increase on your accounts, especially on the cards you use the most. Another relatively quick way to improve your credit score is to increase your overall credit limit. A major factor that affects your credit score is your utilization ratio, which is the balance on your card relative to your credit limit. Even when you pay your balance in full every month, your utilization ratio can be high. Increasing your credit limit is a quick way to lower it and consequently improve your score. Just be sure to ask if the card issuer can do this for you without making a hard credit inquiry.

Also, aim for a balance of less than 30% of your available credit limit, even when you pay it off in full every month. That’s because the balance shown on your monthly statement is usually what gets shared with credit reporting agencies. Or, make more than one payment during the month to lower your reported balance.

4. Always pay bills on time. This is the single biggest factor (35%, according to FICO) in determining your credit score. A solid history of timely payments is the best thing you can do consistently to raise and maintain a good credit score. It’s boring but true. And it’s not only credit cards that count towards your score—utilities and other bills can show up on your credit report as well.

5. Don’t close an old account with a good payment history. Even if you no longer use it, or paid off that loan years ago. Old accounts can help show your good history of making payments on time, and that’s something you always want included on your credit report. The longer your history of good debt repayment, the better it is for your score.

6. If you’re shopping for a good loan rate, don’t take too long to research and decide. If you’re looking for a low mortgage or other loan rate, it pays to make 2-3 applications within a short time frame. Applying for a loan always involves checking your credit report, which leaves a hard inquiry on your credit report that can lower your score slightly (about 5 points) for a year. But if all the applications are made within 14-30 days, which is a typical shopping period, it will only be counted as a single inquiry on your credit report.

7. Monitor your credit. Identity theft is on the rise. Check your monthly statements and monitor your credit to look for unfamiliar charges or new lines of credit that you didn’t request to reduce the chances of becoming a victim. Don’t post personal information on social media, such as your birthdate or your mother’s maiden name, that could make it easier for someone to hack into your accounts. Use a hard to guess twelve character or more passphrase with numbers and special characters for your financial accounts.

Getting and maintaining a solid credit score basically boils down to a few simple steps. Once you’re approved for your first lines of credit, follow these basic rules:

Pay your bills on time, every time. Remember, payment history influences your scores the most.

Use only a portion of your credit limit. Keep your balances at less than 30% of your limit. The lower your balances, the better your score.

Include both types of credit accounts—installment loans with regular payments, such as a vehicle loan, and revolving debt, such as a credit card.

Follow these rules and you’ll see an improvement in your credit reports in no time. You’ll also have built a credit score that gets you lower interest rates and access to better credit products.

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