5 Tips to Improve Your Credit Score

If you’re planning to buy a house or take out a loan, you already know how important your credit score is. Your credit score helps you get access to the money you need by showing creditors that you are a trustworthy borrower. If you bring your credit score up enough, you’ll be more likely to get approved for a loan with a lower interest rate and better terms.

Of course, having a low credit score could make it harder for you to get approved for a loan—and even if you do get approved, you could be faced with high interest rates. The good news is that there are ways to recover from bad credit; it just takes a little effort. Here are four tips that could help you improve your credit score.

1. Check Your Credit Profile

Knowledge is power, so finding out where you stand is a great place to start if you want to improve your credit score. Start by requesting copies of all three of your credit reports at annualcreditreport.com. You can access these reports for free every week, per federal mandate (avoid other services offering a free credit report, as they may be scams).

If you find any errors or inaccuracies (such as an account that doesn't belong to you, or a delinquency on an account that was repaid in full), you can dispute your credit report. Reach out to the lender and credit reporting agency to have the information corrected.

The information in your credit reports is used to calculate your credit scores. Yes, you have more than one, as there are three consumer credit bureaus and different scoring models. The most commonly used credit scores are based on FICO's scoring models, which involve five factors:

• Payment history. How diligent you are about paying your bills makes up 35% of your FICO Score.

• Credit usage. How much credit you use relative to how much you have access to constitutes 30% of your FICO Score.

• Credit age. The average age of your loans, credit cards, and other credit determines 15% of your FICO Score.

• Credit mix. Having multiple types of credit to your name (such as installment loans and credit cards) makes up 10% of your FICO Score.

• New credit. When you apply for a loan or credit card, the lender does a hard credit inquiry on your credit profile. This credit score factor determines 10% of your FICO Score.

You can likely get access to your credit scores through banks or lenders you already do business with. It's a good idea to check periodically, so you can see the impact of your actions on your credit profile and make changes accordingly.

Now let's take a look at a few moves to focus on to improve your credit score.

2. Get Current on Your Bills

Making on-time payments every month has the biggest positive impact on your credit score (remember, payment history makes up 35% of a FICO Score). It’s important to note that the score can penalize any evidence of late payments, but it can also reward evidence of good payment history as well.

If you haven't been so diligent in the past, don't worry—it's never too late to re-focus on paying bills on time. As the months go by, you'll build a positive payment history that will positively impact your credit score.

3. Re-Establish Credit

If you've struggled to manage money in the past, you might need to re-establish credit to build a high credit score. It takes time to rebuild, but it's worth doing, as better credit can directly save you money when you need to borrow (say, to buy a car or a home).

Secured credit cards are a fairly easy way to rebuild your credit. You'll need to make a security deposit when you open the account, and then your spending on the card is guaranteed by it—if you don't pay off your charges, the credit card issuer keeps your deposit.

But if you spend using the card, pay off your charges, and be patient, you may eventually be able to "graduate" to an unsecured card and get your security deposit back. Most secured credit cards report payments and balances to the credit bureaus, so if you demonstrate good credit behaviors, you'll see your credit score rise.

4. Pay Down Debt if You Can

If you have established credit and make on-time payments, but your score isn’t as high as you would like, you may want to check your credit card utilization. Credit card utilization is based on the total amount of credit card debt you have versus the total credit lines you’ve been extended. Though all sorts of debt is influential to your credit score, credit card utilization is particularly influential. It's a good rule of thumb to keep your credit utilization below 30%, if possible.

If you're struggling to manage all your debt payments, you may want to consider debt consolidation, which can give you one payment per month and you might end up with a lower interest rate to boot. But if you're having real trouble with your finances and could use some help, you have options for debt relief. Working with a debt settlement company can help you get your finances back on track.

5. Don’t Close Old Credit Cards

If you’re paying down your credit cards and simplifying your finances, you may be tempted to close out those extra cards you no longer use. While it may be satisfying to do so, it also could hurt your credit score (and more so if you're closing accounts that still have unpaid balances).

When you close unused accounts, you’re actually raising your credit utilization ratio, since you still owe the same amount but have a lower credit limit overall. Having been approved for credit that you’re not using will not only help your credit score but will also show that you’re creditworthy.

Go ahead and cut up those cards you no longer use, which may provide the peace of mind you’re craving, but don’t cancel the accounts unless you're paying annual fees for them and not recouping the cost by using the cards' benefits.

Improve Your Credit Score for Better Financial Health

Improving your credit can be a challenge. There’s no quick fix, but with hard work and consistency you can get your credit back on track. Start by finding out where you stand, and focus on addressing your debt and improving your payment track record to make the biggest positive impact on your credit score.