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How to Build and Improve Your Credit Score

If you're trying to improve your credit score, odds are that it is because you know your credit score is low. If you haven't yet, make sure you have a copy of your credit report or look at your credit score. Review it to identify areas you can improve. If you're not sure where to start, here are some helpful tips and tricks to help improve your credit score.

Improving Your Credit Score: Where to Start

If you're trying to build or improve your credit score, odds are that it is because you know your credit score is low. That said, do you know exactly where it's weak? If you haven't yet, make sure you have a copy of your credit report or look at your credit score through a credit monitoring service like Credit Score, which you have access to as a P1FCU member. You can also receive a free copy of your credit report from each of the three credit bureaus at annualcreditreport.com. These reports are free, but if you want to see your individual score from each agency, you may have to pay. Checking your own credit will not damage it, as it is a soft inquiry.

Once you have a copy of your credit report, review it to ensure there are no errors. According to a study by the Federal Trade Commission, 1 in 5 consumers has an error on their credit report! These errors can be significant enough to impact your credit score. Be sure to review your report and dispute any errors. Read this article from the FTC for more information about the dispute process and how to file a dispute for free.

What contributes to a low credit score

Once you've ensured your credit report is accurate, review it to identify areas for improvement.

Your credit report is broken out by types of credit accounts, revolving accounts, mortgage accounts, installment accounts, inquiries, and personal information. At the beginning of your report is a summary that breaks down your average account age, length of your credit history, and so on. When reviewing your report, identify which areas, based on the five factors that impact your score, seem weakest. Remember, from most important to least, the five areas that impact your credit score are payment history, credit utilization, length of credit history, credit inquiries, and account mix. Do you have accounts with missed or late payments? Do you have a high utilization rate? Is your credit history relatively short? Do you have many recent inquiries?

READ: 5 Factors That Influence Your Credit Score

Develop a Plan of Action

Any number of things can contribute to a low credit score; that said, the areas that weigh heaviest on your credit score are payment history, credit utilization, and length of credit history. When reviewing your credit report, check your credit utilization and average account age. If your credit utilization is higher than 30% on your revolving accounts (credit cards and lines of credit), try to lower it. If you have a very short average account length, make sure you have open accounts you plan to keep for the long term.

Now that you're well-versed in what your credit file looks like, you can develop a plan of action for how you will improve your score. The first step most of us can take is to lower our credit utilization. The best practice is to keep our credit utilization below 30%. Your credit score not only looks at your overall utilization but also how much you're using on each card, so if you're keeping a zero balance on every card but using 50% of your available balance on one card, consider spreading your balance out and paying that card down so your utilization is lower. You can also call your credit card companies and request a credit limit increase. They will frequently do this if you have a good payment history with them or have had a salary increase that you still need to report to them. That said, if you're not sure you can manage this higher limit without maxing it out, this may not be the best option for you.

You can also consider taking out a debt consolidation loan, which will be especially beneficial if you carry a balance on several high-interest credit cards.

This will lower your card utilization, and you will only have one payment to manage, hopefully at a lower interest rate than the high rates credit cards carry. While this will involve a hard inquiry on your report, bringing your capacity down to zero will outweigh the impact of any inquiry. With a consolidation loan like this, you just have to ensure that you don't rack up a high balance on your cards again.

READ: Strategies For Paying Off Debt

Next, make sure you are making on-time payments. On-time payments are one of the most important aspects of your credit score. If on-time payments are something you struggle with, consider setting up auto payments to ensure your payments are made on time. If you need help making your payment on time, contact the bank of credit union that holds your loan or credit card and see if you can arrange something that better suits your needs. you might be able to change your due date to a better time in the month, or even lower your payment.

Beyond these two steps, look for other areas of weakness on your credit report. If there is an account in collections, address it if possible. When it is paid off, ask the agency if they will stop reporting to the credit bureaus. Some agencies, but not all, will do this.

You can also get a credit-builder loan or secured credit card. This will be especially important for anyone without a credit history. Secured credit cards are credit cards that require you to put down a deposit for your credit limit. Once you've established a payment history, you will get your deposit back. You can also see about being added as an authorized user to a trusted family member or friend's credit card. You don't even have to use this card, but it will help build your credit history. You just need to make sure this relative or friend uses their card responsibly.

Furthermore, you need to have patience. While some credit changes reflect instantly, most loan payoffs or other changes only update monthly. Improving your credit takes patience and determination, but it's well worth it in the end.

This is for educational purposes only and not financial advice.