If you’re planning on buying a house, refinancing your current mortgage or just hoping to strengthen your financial future, then it’s time to maximize your credit score. Having the best possible credit score will help lenders determine your creditworthiness, and ideally offer you a lower interest rate on your home loan. Start your New Year with one resolution already completed by following our five ways to boost your credit score before 2015.
Ways to Boost Your Credit Score
1. Avoid incurring new debt over the holidays
While it may be tempting to go overboard with spending during the holiday season, remember that incurring new debt will lower your credit score. Stick to using cash you currently have on hand, whether it be disposable income from your paycheck or cash from your general savings account. If you really want to be proactive with your credit score, spend less than you normally would on gifts and festivities, and instead use those additional savings to make extra payments on any current debt you have.
2. Pay your bills on time
As you work toward eliminating debt, be sure to remember your current bill payments! Cell phone carriers, utility companies, medical institutions and most other obligations will report delinquent accounts to the credit bureaus, so it’s important to stay on top of those payments each month. Signing up for automatic bill pay is a good way to keep current with your payments; just be sure to check the amounts each month to ensure you’re not being charged incorrectly.
3. Analyze your credit utilization
It’s generally agreed that having some credit history is better than having no credit at all, so if you don’t have any credit cards, start by opening one account. You definitely don’t want to rack up unnecessary debt, so simply pick one bill to pay with that credit card each month and then immediately pay off the balance.
If you already have some credit card debt, know that lenders want to see a good debt-to-credit ratio; that is, how much of an outstanding balance you have compared to your credit limit. When it comes to multiple credit card balances or even other loans you may be carrying (school, car, etc) it’s a good idea to talk to a finance professional about whether consolidating your loans into one single payment may be better for you.
4. Don’t open or close any credit card accounts
Unless you have zero credit history, don’t apply for any new credit cards and don’t close any current accounts – both will cause your credit score to dip. Plus, keeping a credit card open without carrying any debt on it will lower your debt-to-credit ratio. Stability is the name of the game when working on your credit score.
5. Improve your debt-to-credit ratio
Another way to lower that credit utilization is to ask your credit card company to increase your credit limit. If you have more than one card, pick one on which you have a low (or zero) balance and have historically made regular payments, as this will make you a stronger candidate for extended credit. For example, if you have $2,000 charged to a card with a $10,000 limit, requesting a $15,000 limit will bring down your credit utilization from 20% to just over 13%. Just make sure you don’t use your increased credit as an excuse to go shopping (remember Rule #1). If you don’t have much self-constraint, skip this step and focus on eliminating your current debt. If you do trust yourself, however, then it takes just a quick phone call with your credit card company to quickly boost your credit score.
Ring in the New Year with your best credit score yet. If you’re checking your credit score to apply for a mortgage or refinance your current home loan, Carlyle Financial can offer recommendations on more best practices for obtaining the right mortgage rate and term for you.
What other tips do you have for raising your credit score?