6 things to do to improve your credit in 2020
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Editor’s note: This post has been updated with the latest credit card information.
Now is a great opportunity to rack up rewards points, plan for future vacations and make the most of your everyday spending habits. It also brings a new chance to focus on improving your credit score, something that can earn you better loan and reward terms. Here’s where to start:
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Monitor your credit score
Check your credit score regularly. This will show you in real time how your actions impact your credit score. Issuers that offer free, regularly-updated credit scores to cardholders include American Express (by enrolling in its free MyCreditGuide), Bank of America, Barclays, Capital One (via its CreditWise service), Chase (via Credit Journey), Citi, Discover (via its Credit Scorecard service), U.S. Bank (via the CreditView Dashboard online service) and Wells Fargo (through Wells Fargo Online).
Related reading: How to check your credit score for absolutely free
How are credit scores calculated?
FICO scores are based on five factors: payment history, amount owed, length of credit history, new credit and credit mix. The total amount you owe and your payment history hold the most sway over your FICO score, with each accounting for more than 30% of your total score.
Related reading: How credit scores work
How to improve your score
First, check your credit report to see what might be dragging down your score. Address any errors. Then, pay your bills on time every time.
Once you pay a card off, keep the account open. While it may feel like a victory, closing down a paid-off card can actually pull your credit score down.
Related reading: Should I cancel my credit cards if I don’t use them anymore?
How do inquiries affect credit scores?
The impact of an inquiry on your credit report depends on the type of inquiry. Hard inquiries, which happen once you’ve applied for a lease, loan or credit card, can bring your credit score down slightly. For most people, one hard inquiry shaves five points off a credit score.
Related reading: How does applying for a new credit card affect my credit score?
Multiple inquiries for things like auto, mortgage or student loans are typically treated as a single inquiry since they tend to signal a customer shopping around for the best rates and terms. Inquiries for several credit cards within a short time period can be perceived as a red flag by lenders. Soft inquiries are when you check your own credit report or a lender pre-approves you for a loan offer. These don’t negatively impact credit scores.
Review your credit report
Your credit score is only part of the picture. You’ll also want to check your credit report, especially if you’re just starting on the path of improving your credit. Correcting mistakes on your credit report is one of the easiest ways to begin improving your credit.
The government grants you free access to a credit report each year from each of the three major credit reporting buearus — Experian, Equifax and Transunion. Go to annualcreditreport.com for yours. You’re also entitled to a free credit report whenever a creditor denies your application for credit.
Grade your own financial performance
Credit agencies offer a well-rounded perspective of how lenders see you, but it’s equally important to look in the mirror and change habits that may be holding you back.
How to use your credit card properly
The smartest way to use your credit card is to pay it off every month and collect your rewards. If you must carry a balance, make every single payment on time. Set your account to autopay your minimum payments. Make additional payments to pay down your debt as quickly as possible, particularly if it comes at a high interest rate.
Related reading: 10 commandments for travel rewards credit cards
You’ll want to keep any balance you do carry to under 30% of the card’s limit since credit utilization — how much of your card’s available credit you’re using at any given time — factors into your credit score. Shop around for interest rates and don’t be afraid to contact your lender and ask for a decrease if you have a track record of on-time payments, especially during this period of exceptionally low interest rates.
Related reading: How important is my credit utilization ratio?
How long does it take to improve credit?
Settle in because it’s going to take a while to fix a damaged credit report. Delinquencies — generally reported to credit bureaus after two consecutive missed payments — remain on your report for seven years. Inquiries can remain on your credit report for up to two years.
Make the most of your checking account
Your bank is your best friend when it comes to improving your credit score. You’ll want to use your checking account to set up automatic minimum payments on every account you have. Remember, payment history makes up about 35% of your credit score.
Mistakes linger on credit reports, and the best thing you can do for your credit score is avoid them. Many banks offer budgeting tools to help track spending and saving as well.
Consider requesting a credit limit increase
If you’ve got a history of on-time payments or just got a big raise, consider asking for higher credit limit. This might trigger an inquiry that’ll temporary hit your score by a few points, but in the long term, having more available credit drives down a metric called utilization and ultimately drives up credit scores.
Credit limit increases may also be easier to get than you think. A 2018 survey conducted by CreditCards.com revealed that 85% of cardholders who asked for a credit limit increase were successful.
Related reading: Here’s why you should never turn down a credit limit increase
Earn credit for paying your bills and maintaining bank balances
If you don’t have a strong credit history, consider Experian Boost, a free service for adding utility and telecom payments to your Experian credit file to build payment history.
If you’re a saver and have a history of healthy bank balances, UltraFico may be an option for you. UltraFico is a pilot program that takes checking and savings information into account when calculating scores.
During a good or bad economy, you always want to ensure that your credit score remains high. Those with lower scores can be stuck with credit cards that have limited perks, more fees and higher interest rates. It also makes it harder to rent or buy a home, turn on utilities or get personal or auto loans. You can avoid this fate by following the steps outlined above.
If you want to learn even more about credit scores, check out these links:
- 5 key considerations for improving your credit score
- Does it hurt to pay off your credit card balance before the billing cycle ends?
- 4 incorrect assumptions about your credit score
- What credit score do you need to get the Chase Sapphire Preferred card?
Featured photo by Getty Images.
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