Whether you agree to the notion or not, there is no denying that your credit score will determine the success of many of your financial transactions. Think of it like your reputation of sorts; only in digital form. It will precede you in every activity you take and can even dictate whether or not lenders will approve your applications. In some cases, it might even affect your hiring prospects especially if you are applying for finance-related jobs.
So far we’ve been talking about how you can stop your credit score from taking a steep dive or, at the very least, protect it from unwanted and unfavorable mark downs. However, it’s best to make a more proactive stance and ask: What can I do to increase my credit score? As with everything else, there are many ways to skin the proverbial cat but, first, there are a few things that you have to understand.
Believe it or not, your credit score actually changes on a month to month basis. That figure you see on your credit score actually just reflects its most recent shift. The general reason why your credit score regularly changes is due to your own activities. The more specific answer, however, is that the changes are caused by several factors in your payment history.
Things like late payments, repossessions, and declarations of bankruptcy tend to leave a serious dent on your score. The worst part of this is that these events remain as items on your payment history for quite a while, 6 years from the point at which debt has been cleared.
Fortunately for you, items in your payment history (whether good or bad) tend to diminish in their effect the more they age. So, if a late payment caused your score to go down by 2 points, you’d notice a slight decimal increase in your score the further back that negative item is pushed in your payment timeline. This assumes, of course, that you haven’t had accumulated any other negative item ever since.
More often than not, it’s your credit utilisation ratio which is the one that will heavily affect your credit score. In relation to this, changes in your credit limit and balances will shift your score up and down on a monthly basis depending on the change itself.
So, for example, if you have a credit limit this month of £5,000.00 and your balance is at £2,000.00, then 5,000 divided by 2,000 is 0.4. This leaves you with a 40% credit utilisation rate.
Since your credit limit can change on a regular basis, your credit score will considerably change every report. If you want changes in your score to be more positive, it’s best to aim for the 20% to 40% utilisation range.
Contrary to the effect of aging items in your payment history, the age of your accounts themselves tend to have a positive impact on your overall credit score. Most credit reference agencies tend to rate account holders better the older their accounts get. For instance, if your first account has been active for more than a decade, its continued existence will help you get a better score.
On the flip side, closing your older accounts tend to lower your score considerably. This is because you are effectively removing a portion of your financial timeline, along with all of their good and bad entries.
This is not exactly your fault but being placed on a new scorecard tends to have an effect on your overall score. This is what is called as scorecard hopping and many credit reference agencies often do this for the sake of convenience by grouping each person into groups and evaluating them separately; as opposed to evaluating one large list of people.
Now, agencies have kept mum as to how they group accounts but it is safe to say that they are categorising it under different demographics and payment behaviors. For instance, you might be grouped with other delinquent account holders because you’ve racked up several late payments. However, if you do start paying on time, you’d be moved to a new scorecard. What that group’s overall classification will determine if your score moves up or down.
These are just a few of several things that can affect your score, be it positively or negatively. What is left to do then is to make sure that your credit score follows a generally upward trend. Here are a few methods on how:
Before you start working your way up, you’d have to know your most recent credit score. To do that, you’d have to ask for a credit report from your credit reporting company. Depending on the policy, you are entitled to one free credit report per year although typical processing fees for a report are not that expensive. You could opt for a free report from these companies.
Once you have your report, you need to be as meticulous as possible in examining everything. The goal here is to make sure that every entry there is factual and accurate as they can affect your score. If you think that some data entries are off like an unauthorised transaction, you need to contact the company and dispute their report. An amended version should come soon after you have settled the dispute with the company.
If you do find that everything is correct, it’s time to clean your history starting by working through the following points.
As was stated, your credit utilisation rate should not go beyond 40%. If you go beyond that amount, it’s best to start paying your balances as quick as possible. There are many ways out there that can help you manage your debts as quickly as possible. The point is that you should always settle your debts on time so that your credit utilisation rate does not fluctuate wildly every month.
The problem with credit card companies when it comes to reporting balances is that they do it only once a month. In some instances, this could make you look like you’re overusing your credit especially if you are a big spender.
For example, you have a card with a £2,000 credit limit which you always hit every month. You get a statement notifying that you’ve hit the limit and then promptly send your payment. Since they report only once a month, it looks like you have got £2,000 available credit and £2,000 in your balance. As far as your credit utilisation rate is concerned, that’s a 100% usage rate.
To counteract this, you must break down your payment into several smaller ones and send them incrementally. This not only serves to alleviate the utilisation rate you are going to get but paying at least twice a month should help in lowering your balances every time that the credit card company reports your balance to the credit reference agency.
Perhaps you are not that keen in paying your balances in small increments as that is too much of a hassle for you. Your other option is to move your limit in such a way that your usual credit expenses will never go near it. If, for example, you always hit the £2,000 mark, you could call your card company and ask for a 100% raise in your limit. With your limit at the £4,000 mark, you’ve effectively cut your credit utilisation rate by 50% !
Of course, this is not going to work if you’re just going to increase your spending. It’s a pitfall among many credit holders to start spending like crazy the moment that their limit increase gets approved. Stay within your usual spending limit prior to the increase to keep the utilisation rate at a low.
Now what if the creditor refuses to raise your limit? Your last option is to open a new line of credit from a different credit issuing company. It won’t matter, anyway, that your available credit is in another account since the credit report factors in all of your active accounts when computing your credit utilisation rate.
For instance, your current card’s limit is at £2,000, which you’ve maxed out, and the lender refuses to raise your limit. You apply for a new credit from somewhere else with a limit at £5,000.00. Now, your overall available credit is at £7,000.00, and dividing this from your usual month balance of £2,000.00, which leaves you with 28.5% credit utilisation rate every month. That is way within the accepted credit utilisation rate which should boost your score up.
Of course, having multiple active accounts will not be suitable for you especially if you are starting to struggle in keeping them open. If possible, only apply for a new account when you’ve finally gotten the hang out of managing your first one.
Increasing your credit score is not impossible but it’s going to be demanding. It will require you to constantly toe the line between maintaining debt and paying balances on time so as just to give a good impression to the credit reporting companies.
Do it right, however, and you’d notice a gradual upwards trend in your score. Once your score is up by at least 5 points. The challenge then is to prevent yourself from doing anything stupid that could cause that score to plummet.
Have you experienced gradual increases in your credit score? What do you think are other effective ways to make credit scores follow an upward trend? Let us know in the comments!