Among the most important aspects of your financial health is your credit score. It tells the lenders a lot about how responsibly you handle your credit. A good credit score would make it easier for you to be approved for new lines of credit or loans. Having a higher credit score truly helps while applying for new credit lines.
It opens the doors to the lowest interest rates available on them. It’s not so difficult to improve your credit score. You just have to do some simple things in a disciplined manner. To help you understand this better, we’ve listed some of these steps here:
1. Aim for a credit utilization of 30% or less
There are some simple ways to control your credit utilization. One of them is to pay the balances of your credit card in full each month. Credit utilization refers to the part of your credit limit you’re using at a given time. After your payment history, this is the second most important factor affecting your credit score.
Try keeping your overall outstanding balance at 30% or less of your total credit limit. You can then work towards bringing that down to 10% or less. This would be an excellent approach for improving your credit score.
2. Consolidate your debts
If you have several outstanding debts, it is advisable to go for a debt consolidation loan. Once this is done, you can pay off all those debts. This works to your advantage, as you’ll have just one payment to deal with. You can pay off your debts faster if your debt consolidation loan has a lower rate of interest. This can improve your credit utilization ratio, which would obviously enhance your credit score.
Another great strategy is to use a balance transfer credit card for paying off your multiple credit balances. However, you must be aware of the balance transfer fees. It would cost you 3 to 5% of the amount of your transfer. One good thing about such cards is that they charge 0% interest on your balance during their promotional period.
3. Avoid late payments
This is another simple way to make your credit score better. Late payments must be avoided at all costs and there are some small steps you can take in this regard. One is to create a file to keep track of your monthly bills. This can be a paper or a digital file. You can set due-date alerts on your smartphone to know beforehand when a bill payment is to be done.
If possible, you can also automate bill payments from your bank account. Another excellent option worth trying is to use a credit card to make your monthly bill payments. One thing to keep in mind is that you’ll need to pay the balance in full each month.
4. Limit your new credit requests
Application for some form of new credit results in a ‘hard inquiry’. An occasional hard inquiry doesn’t have much of an effect. It is many hard inquiries within a short period of time that damages your credit score. They can adversely affect your credit score for a period spanning a few months to almost two years.
Let’s say you’ve made new applications for different credit cards within a short period of time. Banks might assume that you’re facing financial difficulty. They think that you’ll use all these new credit cards to pay off your existing debt. So, the banks would conclude that you’re risky for them.
Make sure that you don’t apply for new credit for a long time after your previous application. This would help in keeping your credit score from going down.