After seeing an 8-point increase in 2020, the average credit score in the U.S. is now 711. That increase was the largest seen since 2016 when the average score increased by 4-points from the previous year.
Whether Americans are getting savvier with their spending — and savings — or an increase in readily available tools and resources caused the increase is unclear. But what is clear is that many individuals are working to improve their credit scores.
Raising your score starts with adapting good credit practices. If you’re ready to take the first steps towards a better financial future, keep reading to learn a few good credit practices that everyone can benefit from.
Monitor Your Credit
If you’ve never closely monitored your credit, you’re making a big mistake and could be leaving points on the table. Mistakes on credit reports are more common than you might think. A study conducted by Consumer Reports found that one-third of the nearly 6,000 participants found a mistake on their credit report.
There are a variety of types of mistakes that may make their way onto your report. They range from small mistakes, like errors in your personal information, to major errors, like misreporting that could affect your score and cause it to drop.
So how do you stay on top of checking your credit report? A tool like ScoreWatcher can help. This app allows you to quickly and easily track your credit score and monitor your report. You can even get alerts when something goes wrong. And if something does go wrong, you’ll have Identity Theft Insurance that can provide up to $1 million in protection for any damages sustained.
Pay Off Your Debts
A variety of factors goes into determining your credit score. One of those factors is your credit utilization rate.
What is your credit utilization rate? Put simply, this is the percentage of your total available credit and credit lines you’re currently using. For instance, if you have three credit cards, each providing you with a $1,000 line of credit, and you’ve charged $1,000 collectively across the three cards, your credit utilization rate would be 30%.
Your credit utilization rate accounts for 30% of your credit score. A high utilization rate can cause your score to drop. Generally, it’s recommended that you keep your credit utilization rate at or below 30%.
The best way to lower your utilization rate and boost your credit score is to pay off your debts. Pay off credit cards with the highest interest rates first. While you’re working to pay down any debts you already have, avoid taking on new, unnecessary debts that will set you back even further from your goals.
Ask Lender for Lower Interest Rates
One big problem with carrying a large amount of debt on your credit cards is the interest rates. If your interest rates are high, you’ll be paying a lot of money towards those interest rates each month, making it even harder to pay down your debts.
If you’ve been a responsible credit card holder, making on-time payments, you may be able to request a lower interest rate. This will allow you to pay down your debts even faster.
Pay Your Bills on Time
Another factor that goes into determining your credit score is the number of late payments you’ve had. This includes late payments on your credit cards, as well as on other debts. Even a single late payment can cause your score to drop. Luckily, paying your credit card bill the day after it is due is unlikely to affect your credit score. In most cases, late payments are reported 30 days after they were initially due.
If you pay your bill within a few days or even a week or two after it’s due, it likely won’t affect your score. However, you will incur late fees. These late fees mean less money in your pocket to work towards paying down your debts. Additionally, your credit card provider may choose to lower your credit limit as a result of missed payments. This may occur even if they aren’t reported to the credit reporting agencies. If your credit limit is lowered, your credit utilization rate will increase, which, in turn, can lower your credit score.
Bills that aren’t paid within that 30-day window will be reported and will go onto your credit report. A single late payment could cause your credit score to drop by as much as 180 points. That late payment will stay on your credit report for 7 years from the date when your payment was initially due.
Setting up automatic bill pay or setting reminders for yourself on your phone or computer can help you avoid late payments.
Keep a Good Account Mix
Even though you likely have more than one, you might not realize that there are actually a few three different types of credit accounts: revolving, installment, and open accounts. While a credit card is a revolving account, your home mortgage is an installment account. Keeping a good mix of accounts is good for your credit score.
Keep Your Good Accounts Open
When you’re struggling to break bad credit habits, it might be tempting to close some accounts to avoid the temptation to rack up additional debt. However, this can be a big mistake.
The age of your oldest credit account is one of the many factors that go into determining your credit score. The older the account, the better. If you close an older account, your credit score may suffer.
Rather than closing your account, aim to make a few small purchases with that card each month Then, pay off that debt in full so that you aren’t carrying a balance.
Avoid Hard Inquiries
There are two types of inquiries that can be made on your credit score; hard and soft inquiries. Soft inquiries don’t affect your credit score. If you check your own score through a free report from your credit card provider or another service are soft inquiries. So are inquiries run by your employer or a potential employer.
Hard inquiries do affect your credit score. Some entities that can run hard inquiries on your credit report include:
- Banks
- Loan providers
- Credit unions
These entities use a credit inquiry to determine whether or not to lend to you, how much they can lend, and your interest rates. Hard inquiries are necessary when you’re buying a car or applying for a new credit card. However, it’s best to avoid hard inquiries as much as possible. Too many in a 12-month period can cause your score to drop
Increase Your Credit Limit
Paying down your debts is one great way to keep your credit utilization rate below 30%. If you’ve struggled to keep your credit card spending in check in the past, this is the best credit practice to learn. However, if you know that you’ll need to use your credit for big purchases in the near future, you may want to consider increasing your credit limits.
This can be done through a request to your credit card provider. If you’ve been good about making on-time payments and keeping your debts down in the past, your credit card company will likely allow you to increase your spending limit. This will instantly lower your credit utilization rate, which could help improve your score. Just be sure to not increase your spending to keep up with your increased limit.
Developing Good Credit Practices
If you want to improve your credit score, developing these good credit practices is a great place to start. Not only will these moves help improve your score today, but they will also set you up for a better financial future.
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