Charles H. Miller
The reality is that the richest folks pay the least to borrow money. There’s a rational reason behind this — banks and other loan providers know with great dose of certainty this group will return all the money they borrow. These guys and gals have excellent credit ratings, making it easier for them to be approved for any credit card they want and get the lowest APR possible along the way.
Whether we are talking about credit cards or any loan, your credit score determines the amount of interest you will pay to the credit card issuer and/or any other loan provider. There are some things you could do to raise that number and most of them don’t require that you are a millionaire. Here are 7 things you should add to your to-do list in order to raise your credit score (so that you can pay lower interest rates).
Recommended guide:
1. Lower Your Credit Utilization Ratio
These is nothing wrong in paying for everything with your credit card. The problem is when people carry too much balance throughout the year, and end-up paying high interest rates.
In order to raise your credit score, you need to lower your credit utilization ratio — which shows the percentage of credit limit use. So if you have a $1,000 credit card limit and $800 balance, your credit utilization ratio is 80 percent. That would be great if you pay your monthly balance in full and on time. The problem is when you carry that balance from one month to the other.
Credit bureaus will increase your credit score when you lower your credit utilization ratio under 50 percent, and in some cases under 30 percent. You should know that credit utilization ratio makes up 30 percent of your credit score, so this is one of the quickest (though perhaps not easiest) ways to improve your score.
For what it matters, people with the highest credit scores have a utilization ratio between 1 and 10 percent.
2. Increase Your Credit Limit
This is a fairly simple trick to decrease your credit utilization ratio — by increasing your credit limit, your credit card balance will present a lower percentage of the (newly approved) credit limit.
The problem, however, is when you can’t control yourself and you end up with a higher balance at the end of the month. In that sense, you should be careful when (before?) asking for the credit limit increase.
If you do want to proceed, you will have to call or visit your bank’s office and ask them for this. Since that’s the way they make their money, in many cases they will gladly do this for you. They will, however, want to be as certain as possible that at the end of the day, you will be able to return them the money.
On your end, you just want to increase your credit score, not get into more debt.
3. Pay Off a Loan
Easier said than done, but you gotta try it in order to improve your credit score, and consequently make it more affordable to borrow money in the future.
Whether it is a student or auto loan, paying it off will give your credit score a boost. Once a loan has been cleared, creditors report the activity to credit bureaus that add a little plus to your credit score.
Even if you don’t care about your credit score, it is worth the effort to pay off all of your loans to accomplish what experts call the “financial freedom.”
Start with the smallest loan and take it from there.
4. Pay Your Bills on Time
Your payment history makes up 35 percent of your credit score, according to myFICO. So you should try your best to pay every single bill on time, and do this every month. Yes, you will have to make some adjustments in the way you manage your cash flow, but the effort is well worth it.
In contrast, a 30-day late payment will knock points off your credit score. And if this bad practice is repeated several times a year, your credit score will tank making it much more expensive to borrow money in the future. Don’t do it.
5. Diversify Your Credit
Diversification makes up 10 percent of your credit score, so in a way it is good to borrow money from multiple sources. As long as you know what you are doing, this will help you increase your credit score.
Most people have a credit card, a mortgage and perhaps some personal loan. Paying these regularly can take you a long way. Just don’t take any extra debt for the sake of diversification — that’s not what we’re suggesting here. We think you should own a home and most of us don’t have readily available cash to buy one — so we have to get a mortgage. Also, credit cards are pretty much a must these days.
6. Don’t Open Too Many New Accounts
Some credit card issuers offer amazing sign-up bonuses but that doesn’t mean you should open as many new credit cards as you can. Doing that in a short span of time has a negative impact on your credit score, while also prompting you to spend more. Those sign-up bonuses are typically tied with certain threshold you must reach in order to get the free points or cash back.
That being said, we do advise our readers to have multiple credit cards, and use them for what they are made. For instance, I have one card for travel, one for groceries and gas, and another one for all other expenses. I try my best to make regular payments and to keep my balance as close to zero as possible. That way I get all of the benefits with little to no extra cost. You should try doing that, too.
7. Check Your Credit
Unfortunately, credit report errors are not uncommon and they could hurt your rating even if you have paid your dues. Therefore it is advisable to check your credit rating from time to time. You can do that through TransUnion, myFICO or AnnualCreditReport.com and examine the contents for mistakes. If you notice something weird, make a dispute to resolve it. And if you’re right, the bureaus and creditors will update your report with accurate information, and potentially increase your score. Good luck! 😉
Also read: How to Dispute a Mistake on Your Credit Report
