If you want to buy a house any time in the near future, your credit score matters. Lenders use your credit score to determine how risky it is to loan you money.
With a higher score, you’ll have a better chance of getting approved for a mortgage. Also, you’re more likely to qualify for a lower mortgage rate, as well. When you’re talking about a considerable-size loan like a mortgage, a lower half percentage point can mean thousands of dollars in interest savings over the life of the loan.
Since it’s such an important factor for your future borrowing needs, it’s incumbent on you to track your credit score and improve it as best you can. Rocket HQ can definitely help with the tracking part, but if you want to improve it, here are three smart tips to consider.
Pay Your Bills on Time
Your payment history counts for 35% of your credit score. If you’re paying your bills late or you have some accounts in collection, this seriously affects your score.
If you’re ready to grow your credit score, make a commitment to pay your bills and loans on time going forward. There are excellent mini-hacks to making late payments a thing of the past. Here are a few that I love:
Develop a Monthly Budget
Everyone knows their income, but not everyone knows their expenses. When you understand where your money is going, you’re less likely to have late payments.
Craft a budget with a digital tool like Tiller or YNAB so you know how you’re using your income each month. If you’re not into online apps, grab a piece of paper and start jotting down your monthly expenses. Start with the big expenses like housing, transportation, food, utilities, debts and entertainment. The first few budgets you create won’t be perfect, but you’ll improve over time.
The clarity that will come from this exercise will help you feel empowered and you’ll see that it’s easier to make your payments on time.
Sign Up for Auto Pay
There is a lovely monthly feature with your credit card and utility bills called Auto Pay.
This feature will save you from missing your payments because…it’s automatic. You don’t even have to think about it. The due date arrives and as long as you’ve synched up a proper payment account (and there’s enough funds in your account), your bill is automatically paid.
Have an Emergency Fund
Perhaps you’re digging the idea of utilizing an auto pay feature, but you’re worried about having enough cash in your account. While your budget will definitely help, another layer of protection is to have an emergency fund valued at least one month of expenses in your checking account. This will cover any math errors on your end and will give you a safety net of cash reserves as you’re becoming used to your new budgeting lifestyle.
Keep Your Credit Utilization Low
The next most important element to concern yourself with when it comes to growing your credit score is not utilizing all the credit available to you. This factor counts for 30% of your overall credit score.
For example, if you have $10,000 of available credit and you’re using $9,000 of it, that will negatively affect your credit score. This type of activity shows creditors that you are a riskier borrower.
By keeping your credit utilization lower, you’re going to definitely increase your credit score. A good rule of thumb is to keep your utilization lower than 30%, but there is some debate on that specific percentage. Just know…the lower the better.
Here are some tactics to help with the process:
Decrease Your Spending with a “No Spend Challenge”
If you’re having difficulty keeping your credit utilization low, it might be time to go cold turkey on spending for a while. I’m not talking about starving yourself or not filling up your car with fuel. Simply analyzing your personal spending and practicing self-discipline by saying no to your “wants” for a while can go a long way.
For example, if you’re used to purchasing that $4 latte every day when you’re on your way to work, try brewing your own coffee for a full month and saying no to the lattes. This decrease in spending on your credit card (along with eliminating a few other pricey habits like clothes shopping, subscriptions, etc.) could go a long way in decreasing your utilization rate.
Increase Your Credit Limit
By simply reaching out to your credit card issuer and requesting it, you may be able to increase your credit limit. This action could automatically decrease your overall credit utilization rate.
Know that the credit issuer will make this decision (sometimes an online system does it as well) based on your credit history and how long you’ve been a card holder. Hey, it can’t hurt to ask. Just make sure you’re not spending more just because you have an increased line of credit. That’s a slippery slope that could prove counterproductive to improving your credit score
Set Up Balance Alerts
If you know you want your credit utilization rate lower than 30%, work with your credit card company to send you a notification via email or text when your balance approaches 25%. That way, you’re taking care of it before it becomes a problem.
A lot of credit card companies offer these complimentary alerts directly through their website. Sign up, save yourself the heartache and keep that utilization low.
Develop a Long History of Credit
The average credit account age is also a very important factor in increasing your overall credit score. This piece of the credit score puzzle has a 15% impact on your credit score. So, the longer you’ve been borrowing money from your lenders, the higher your score will be.
While it’s a great financial goal to pay off a credit card you’ve had for a while and close it, this can negatively affect your score. With this part of the credit score accounting for only 15% of your total, don’t feel too bad if you’re paying down your debt and eliminating lines of credit.
A win-win in this scenario would be to keep a card you’ve had for a while and pay for something very small with it each month (Netflix or Spotify subscription). That way, you’re growing your average account age and keeping your credit utilization low. If you end up utilizing a monthly budget, you’ll start to pay your bills on time and then you’ll truly hit the trifecta of credit score growth!
How are you growing your credit score? Please let us know in the comments below.
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