- 1 How to Improve Your Credit Score, A Step by Step Guide for 2017
- 1.1 These things negatively impact your credit score every time
- 2 Should You Accept That Pre-Approved Credit Limit Increase?
- 3 How To Get An Instant Credit Limit Increase With Citibank
- 4 My Bank Trusts Me More Than I Do and Just Raised My Credit Limit to $22K
How to Improve Your Credit Score, A Step by Step Guide for 2017
By Naomi Mannino, Rachel Morey, David Rodeck and Kimberly Rotter
A higher credit score means lower mortgage interest rates, better credit card offers and better insurance rates. Increasing your credit score fast is possible.
Not all credit problems are the same because the reasons for a low score vary depending on your personal credit history factors, your current financial situation and your money management style. No matter what the reason, there are three basic steps to create your own personalized plan to improve your credit score.
1. Learn about things that negatively impact your credit score
Your credit score is based on five keys factors and they hold the solution to improving your credit. If you can get these five things right, your score will go up naturally and easily over time.
- Payment history is the most important credit factor because it shows whether you pay your debts on time, every time
- Credit utilization describes the amount of credit you’ve used in relation to your total credit limit
- Credit age shows how long you’ve maintained your credit accounts and older is better than younger
- Credit mix is the variety of credit accounts you have. More than one type shows you can manage a range of credit products.
- Inquiries show how often you apply for credit and what types
2. Check to see exactly which credit factors are causing your low credit score
When you check your free annual credit reports (available at annualcreditreport.com) you will begin to see what is causing your credit score to be low. When you compare them with your free credit report card on Credit Sesame, you will learn what you need to do to improve your credit score. Our service is 100% free, and there’s no hidden charge. Rest assured, you never have to input a credit card number or your full Social Security Number, and all data you provide is safely encrypted.
3. Follow the steps in this guide to fix your issues
Read through this guide and see which actions will work for your particular credit and financial situation and get started improving your credit score as quickly as possible.
These things negatively impact your credit score every time
Not all credit problems are the same. Late payments, collections, bankruptcy, a large number of credit inquiries, a high credit card utilization rate and even credit report mistakes all have a negative effect on your score.
The first step is to diagnose the reason for your less-than-perfect credit score.
Sign up for a free membership on Credit Sesame and review your free credit report card. You’ll see a letter grade assigned to each factor that affects your credit. Anything less than an A has room for improvement.
Below are the 5 most important credit score factors and how they impact your credit score.
Now ask yourself the following questions and keep track of the “yes” responses:
The most important factor in your credit score is your payment history . Late payments quickly and negatively affect your credit score. Every monthly payment helps your score but just one missed payment can wreck all your progress. If you miss a due date, make the payment as soon as possible because lenders typically wait until a payment is 30 days late before reporting it.
Your credit utilization ratio counts nearly as much as your payment history. Credit utilization is the amount of credit card debt versus your total outstanding credit limit. If all your cards are maxed out you have very high credit utilization (also called amounts owed). For example, if you have $3,000 of debt and a $4,000 combined credit limit, your utilization ratio is 75%.
Bring your balances down to improve your score. The lower your ratio, the better the boost to your score (people with the best credit scores use no more than 7% of their available credit).
Credit utilization is calculated for each card and overall. Even one maxed out card can hurt your score.
Credit Sesame users who have scores 800 or higher barely have any credit card debt: The average credit card limit among users who have the highest score (839) is a generous $12,898, yet the average balance is a mere $54. That’s a credit utilization ratio of 0.42%.
Do you close your old accounts or have only very new accounts?
The third factor is the average age of your credit accounts. Over time, you will gain points in this category and that’s one reason why you shouldn’t close old accounts or those you have paid off.
The next factor is credit mix . The credit bureaus like to see that you can handle a variety of credit products. For example, student loans, mortgages and auto loans are all installment loans since the balance is fixed, but a credit card or home equity line of credit are revolving credit.
Each inquiry into your credit, or credit application, can cause your score to drop by a few points. Soft inquiries, including employer checks, self-checks and inquiries made for the purpose of prequalifying you for promotional offers do not hurt your score. Hard inquiries, however, are those made as the result of an application for new credit. Those are the inquiries to limit.
For each “yes” response, that is one of your personal credit factors that could be causing your low credit score.
There are many ways to improve your credit, some faster than others and some easier than others. Check out our quick-start chart, below, to see which positive credit behaviors you might use to get the biggest impact to your credit score for the least amount of effort.
Now read the expanded explanations to create your personalized strategy to improve your credit score:
- Check your free annual credit reports for mistakes
Correct errors to improve your credit quickly and easily . Many errors are inconsequential (such as a misspelled address), but others can hurt your score. For example, your credit report could mistakenly show that you never paid off an old car loan when, in fact, you did. It can also show you that you’ve been a victim of identity theft if someone else opened accounts in your name that you did not.
If there is an easy way to improve your credit score , it’s error correction on your credit reports. The Federal Trade Commission (FTC) estimates that as many as one in five consumers have an error on one or more of their three major credit reports, and many of those errors are serious enough to affect credit score. Depending on the type of error, asking the credit bureaus to correct them could have an immediate positive effect on your score.
Take a close look at all three of your credit reports. They are available for free, once every twelve months, at AnnualCreditReport.com. When you access your free credit reports, you won’t see your credit score, but you will see your credit history.
If you find an error on your credit report, take the matter up with the credit reporting agency. Disputing an error on your credit report is a simple process, and each of the three major credit bureaus offers instructions when you view your report.
Look for errors like a report of a late payment that’s more than seven years old, accounts that don’t belong to you, paid-off accounts showing as unpaid, accounts discharged in bankruptcy showing as delinquent or with a balance, and tax liens that are paid and more than seven years old.
Check for incorrect names or addresses and inaccurate employer information , as well. While personal information errors won’t hurt your credit, they could be a sign of fraud or reporting mistakes.
Expect to see your dispute resolved within 30 days (45 if you provide additional documentation within the 30-day timeframe). The FTC sets strict guidelines about how much time a creditor has to respond to a dispute. Over half of all disputes are resolved within 14 days. If you don’t get the desired result, you may need to take up the issue directly with the company that provided the incorrect data. You also have the right to file a complaint with the Consumer Financial Protection Bureau (CFPB) or the Attorney General in your state.
You will be able to check on whether disputed errors affecting your credit score are resolved when you view your free credit score report card, updated monthly, on Credit Sesame .
Here’s what a sample credit report looks like:
Payment history accounts for 35 percent of your credit score. A 40 to 100-point drop after just one missed payment is common. The higher your score, the harder the hit. Making payments on time may not cause a quick bump in your credit score but is crucial to maintaining an upward trajectory.
The good news is that a payment that is a few days late, while it may cost you a hefty late fee, will probably not show up on a credit report. Most creditors don’t report late payments until they reach the 30-day mark. Get back on track as quickly as possible.
The only surefire way to increase your score after a series of late payments is to pay on time, every time going forward. Late payments stay on your credit report for seven years but their impact diminishes after two years.
Figure out your cash flow during the month to see if changing your payment due dates might make it easier for you to pay on time. Log in to your accounts or call your creditors to ask them to change your payment dates. You can also use reminder apps, sign up for text alerts and sign up for automatic payments for important credit payments.
Make all of your utility, wireless carrier and rent payments on time. They’ll report late payments, and might even be able to help you establish on-time payment history for some new credit scoring models as well as for some lenders.
- Improve your credit utilization for a fast credit bump
There are two ways to go about this and if they are easy for you, you can get a quick credit score bump in a month or two.
Your score takes a hit if any one card is maxed out (even if they aren’t all maxed out).
One way to build credit fast is to make a large lump sum payment on your credit card debt. Your score will increase as your balances (and credit utilization ratio) go down.
If you pay off a maxed out card, your score can improve by 100 points in a few months. The dollar amounts are not as relevant as the amount of debt you carry, expressed as a percentage of the amount of credit available to you. Make plans now to use an upcoming bonus or your next tax refund to pay down your balances, or look for an extra part-time job.
The second way to build credit fast is to get a credit limit increase without increasing your debt. For example, if you have a $1,500 balance with a $3,000 credit limit, your ratio is 50% which isn’t great. If your card issuer increases your limit to $6,000, you’ve brought your utilization rate down to a respectable 25% without paying down the balance at all. This strategy only works if you already have good credit. Be realistic about your ability to handle a higher limit or additional cards. If there is any risk that you might spend more when you get more available credit, disregard this strategy and just focus on paying down your debt.
- Use different types of credit accounts if you have really poor creditto improve your score fast
If your credit score is in bad shape because of poor financial decisions or management, you may have trouble qualifying for a traditional credit card to build credit. In that case, get a secured credit card to start the clock on a good track record of paying on time.
A secured card i s a credit card that you back up with a cash deposit and many are available to consumers with bad credit or no credit. Pay off your charges completely every month, on time, to help your score steadily increase. You can transition to an unsecured credit card after six to 12 months of on-time payments and request the return of your deposit.
Another way to get a quick credit increase if your personal credit history is poor is to ask to become an authorized user on someone else’s account. If the primary account holder pays the bill on time and keeps the balance low, your credit score will inherit the benefit of those good financial habits. When you become an authorized user , the positive account information is transplanted to your credit file. On the other hand, if that person doesn’t handle the account well, your score will suffer, so be wary who you ask.
A debt consolidation loan might also work. A consolidation loan is reported as an installment loan, not as revolving credit. So if you pay off your credit cards, your utilization will drop to zero and all you need to do is maintain an excellent payment history on the new loan. Be careful! The last thing you want to do is then go out and charge the credit cards back up. If you do, you’ve only doubled your financial trouble.
Paying off collections may or may not help your score. Your results depend on the credit scoring model used to calculate your score.
- The newest versions of FICO ® and VantageScore ® ignore paid collections
- Pay off the most recent delinquent accounts first because these hurt your score the most
- Non-medical collection debt hurts your score more than medical collections
Some consumers succeed with debt settlement. That’s when the creditor agrees to accept less than the full amount owed. The catch is that the forgiven amount may be reported as taxable income and you could be on the hook for the taxes.
Once you pay off a collection account, monitor your credit report . It may take several weeks to see the new account status reported to the credit bureau . If 45 days pass and you don’t see the new account status, initiate a dispute with the bureau that’s reporting the account.
After seven years , a collection account should be removed from your credit report whether it’s paid or not. If the account doesn’t age off, dispute it. A partial payment could restart the clock.
Keep correspondence. “Zombie debt” is old paid debt that is sold to another collection company who then tries to collect.
“Pay for delete” works for some consumers but can be problematic. The credit bureaus are under no obligation to remove the collection account from your file even if the collection agency agrees. Also, the collection account needs to be removed from all three of your credit reports in order to have the desired effect.
Should You Accept That Pre-Approved Credit Limit Increase?
If you faithfully pay your loans, mortgage and credit cards each month, then you’ve probably received a call or letter from your bank with the news that you were pre-approved for a credit increase or a line of credit.
You might be thinking, I don’t even use all the credit I currently have. I don’t need an increase.
But guess what? Turning down a pre-approved credit increase may actually hurt your credit score.
If you already have an account with a bank, and it pre-approves you for a credit increase or new line of credit, it’s typically because you are being recognized for being a good customer. By diligently paying off your card every month and staying on top of your current loans, your bank now trusts that you will pay them back if they increased your limit.
How an increased credit limit can improve your credit score
Usually, when you apply for a loan or request a credit increase, your bank sends in a request to the credit bureau for your current credit score. This is known as a hard credit check. And whenever a credit inquiry is recorded, your score is slightly affected. In the credit bureau’s eyes, applying for new credit is an indication of someone who is having financial difficulties.
However, the bank often doesn’t perform a hard credit check on your file before pre-approving you. Rather than performing a check, the bank’s decision to give you additional credit is typically based on what they already know about you as a customer: repayment history, account balance, how much you’ve invested, etc.
As a precaution, you should still ask the bank if they intend on performing a hard credit check before accepting the increase. Some banks may claim that you’re pre-approved but still do a credit check after the fact. And even if they do plan on performing a check, this doesn’t mean you shouldn’t accept the increase. While one hard credit check won’t cause your score to fall too much, multiple inquiries at the same time could really tank your score.
Decreased credit utilization ratio
Your credit utilization ratio is a key factor that plays into your credit score. It is recommended that you keep your utilization ratio within 10 to 20 per cent of your total available credit across all of your credit sources. This means that if you have $10,000 in total available credit, you shouldn’t carry a balance of more than $2,000. Spending more than 10 to 20 per cent can affect your score – even if you pay off your balance every month.
If you have more than one source of credit, it is also better to spread the balance over each card or line of credit. For example, if you have two credit cards and each has a limit of $5,000, it’s better to have $1,000 in charges on each card than $2,000 in charges on one card.
By increasing your available credit and maintaining the same level of credit utilization, you are essentially decreasing your credit utilization ratio, which can improve your credit score.
For example, if your limit is $5,000 and you spend about $2,000 each month, you are using 40 per cent of your available credit, which is way above the recommended ratio to keeping a good credit score.
But if you accept a pre-approved increase to $10,000, and you continue to spend $2,000 each month, you are only using 20 per cent of your available credit, which is within the recommended ratio range.
Diversified credit portfolio
Did you know that having diverse types of credit on your record can bump up your score? Ten per cent of your score is calculated based on the types of credit you use.
So if you only have credit cards and your bank offers you a line of credit, think about accepting that offer. Having a line of credit can benefit you, and you don’t even have to use it.
You never know when you’ll need It
We often think that we can just call up the bank and request a credit increase when we need it, but that’s not always the case.
For example, I once got a new job and had to buy a car within the span of one week. In an attempt to simplify the process (and earn a bunch of reward points), I planned on paying for part of the car and purchasing insurance on my credit card. However, that would’ve meant spending over 30 per cent of my total credit. I called my bank to request a credit increase, but the time needed for an approval was too long, so I ended up paying for my car via debit.
Similarly, if you lose your job, having a line of credit as a back-up source of income would be a relatively inexpensive way to make ends meet. But if you’re already unemployed, you’re going to have a hard time getting approved for any type of new credit.
Of course, there are reasons why you should say no to a credit increase. If you are in credit card debt or have a problem controlling your spending, giving yourself more credit is probably not a good idea. While an increased limit can potentially improve your credit score, it’s probably better to keep your available credit low if it prevents you from going into further debt.
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How To Get An Instant Credit Limit Increase With Citibank
There are a variety of reasons to get higher credit card limits, including improving your credit score by using a lower percentage of your available credit, and also the ability to get more free money from credit cards, and thus make more interest. Some people say there are disadvantages too, but it’s really easier to decrease your credit limits if somehow you need to.
Sometimes your issuer will automatically increase your limits without asking, like Citibank and MBNA. But many times you need to ask and it often involves a credit check. To be honest, I haven’t very aggressive recently in getting my credit limits as high as they could be. The only thing that I do, because it literally takes 5 seconds to do, is to occasionally request an instant credit limit increase online with Citibank. It doesn’t even hit you with a hard credit pull! Here’s how:
2) On the menu bar, go to Manage My Account > Credit Line Increase Request
3) After that, you’ll get one of two screens. Either you’ll be instantly approved or you’ll have to ask for a manual review.
a. Instantly Approved – Your account will be instantly analyzed and you’ll be offered a specific increase to your current credit limit. Here’s my results from my Citibank Card (click to enlarge):
I got an extra $1,000 to $10,000. Note that it clearly states no credit report was pulled. You can either accept, decline, or ask for a higher increase. Asking for a higher increase is the same as…
b. Manual Review – Here, in order to get a limit increase you’ll have to restate your income and even list some bank account information so they can check your balances. A hard credit pull is also required if you agree to a full review. If you decline then nothing happens.
You can usually get an “free” increase about once every six months. Being rejected usually means you asked already too recently. I usually just try whenever I remember, like today, since rejection does no harm. I’m currently collecting information about the other card issuers.
My Bank Trusts Me More Than I Do and Just Raised My Credit Limit to $22K
“Good news,” the email subject line said.
That’s usually the sort of line my mother uses to talk about holiday plans or the cat’s thyroid medication.
This time, it was my bank. “Good news,” it read, “Credit line increase.”
I opened the message with great skepticism, but it wasn’t a sales pitch or spam. It was a message informing me of my new credit limit: $22,000.
“Congratulations! Your excellent credit history has earned you a credit limit increase to $22,000,” the email read. “Your new credit limit gives you more buying power — right now — for gas, groceries and the things you buy most. Enjoy your increase. You deserve it.”
This wasn’t even a tailored offer for me to opt in or out of. This was a… given. The email magically appeared. And when I logged in to my online account, the new credit limit was listed there, too.
It felt too good to be true. It felt dangerous.
I’m no stranger to credit card debt , and although I now have a clean slate and a glistening credit score, I was suspicious. So I called the number on the back of my credit card.
I asked the customer service rep if he could tell me my limit before the increase, which was $17,000. The jump to $22,000 didn’t seem so outrageous anymore, but I was still curious as to why I got the increase. I hadn’t used that credit card in a while.
Customer service guy said the system routinely checks accounts and, in some cases, boosts the card’s limit. My credit score was probably a factor.
The bank also probably wanted me to spend some money, although customer service guy didn’t say that. If I’m not using my credit card, the bank isn’t making any money from fees or interest.
In short: My credit card company likes me. It likes me enough to trust me with another $5,000.
“So… what if I don’t want my credit limit to be that high?” I asked, implying I have zero trust in my own willpower. “Can you reduce it?”
He said he’d be happy to. “But you may not want to do that.”
He gave me two reasons:
First, it’s easy to ask for a credit limit reduction. But if you call asking for an increase in credit, that’s a harder case to plead — and get approved.
Second, having a high credit limit can help lower your credit utilization ratio, which is a factor in calculating your c redit score .
Say you have one credit card with a $22,000 limit and a $2,000 balance. You’re using about 9% of your available credit, which looks good for your credit history.
But say you have that same balance on a card with a $6,000 limit. You’re using one-third of your available credit. That’s not bad , but it doesn’t look as great.
Making payments on time is a more important factor in calculating your credit score, but utilization rate has up to a 30% impact on your score.
Kristy Gaunt – The Penny Hoarder
Are you holding your credit card right now? Feeling nervous, wondering if you can trust yourself in the great sea of stuff you could buy and bills you could pay?
If having a new, larger credit limit makes your stomach drop, don’t call to get your limit reduced. Don’t just close the card , either — you don’t want to give up the years of credit history you’ve gained from that card.
Instead, acknowledge the change in your account, then set your own personal limit and keep credit utilization in mind.
No one ever said you had to max out your credit card. So pick your own credit limit, and make it far less than whatever the credit card company says it is. If you have a $4,000 limit, don’t use more than $500. If it’s a $12,000 limit, maybe your personal limit is at $2,000.
Challenge yourself to see how low your balance can go.
Lisa Rowan is a writer and producer at The Penny Hoarder.