1. Clean up your credit report
Before you do anything else, go to AnnualCreditReport.com and request a credit report from each of the three big nationwide credit reporting companies:
By law, you’re entitled to one free report every 12 months. When you request it, be ready to print it or save it to your computer.
Once you have the report, examine everything. In particular, look for any accounts that show late payments or unpaid bills. If that information is inaccurate, the report should tell you where to send a dispute.
Keeping a clean credit report isn’t only important for your credit score. It can also affect your job prospects. Some employers pull credit reports before making hiring decisions.
You may also want to sign up for a free account with Credit Sesame, which will give you an idea of how your reports are shaping your credit scores. You’ll also get to see your VantageScore from TransUnion, one of the three big credit reporting companies.
2. Pay down your balance
According to Fair Isaac Corp., aka FICO, the company that calculates one of the most widely used credit scores, 30% of your FICO score is based on the amount you owe.
However, it’s not simply how much you owe that’s important. It’s how much you owe compared with how much credit you have, a ratio known as your credit utilization rate.
For example, if you have a $10,000 credit limit and a $5,000 balance, your credit utilization is 50%. If you’ve maxed out that $10,000 limit, your utilization is 100%.
There are many theories on the ideal credit utilization rate, but Experian suggests it’s best to have a rate of less than 30%. In other words, you should never have more than $3,000 charged at any time if you have a $10,000 limit.
If your credit utilization rate is high, paying down your balances is a quick way to lower that rate and thus boost your score. For more ideas on tackling debt, read “8 Surefire Ways to Get Rid of Debt ASAP.”
3. Pay twice a month
You might think you’re doing great because you pay off your card every month, even if it’s maxed out. The problem is that your creditors are only reporting balances to the credit reporting companies once a month. If you run up a big balance each month, it could look like you’re overusing your credit.
For example, assume you have a credit card with a $1,000 limit. It’s a rewards card, so you use it for everything. In fact, every month, you hit your limit. The statement arrives, you owe $1,000, and you pay it off. But depending on what point in the month the credit card company reports your statement balance, it might look like you have a $1,000 limit and a $1,000 balance every month. That’s a 100% credit utilization rate.
You can help alleviate the problem by breaking up your credit card payments. Go ahead and charge everything to get the rewards, but send in payments at least twice a month to keep your running balance lower. In addition, if you make a large purchase on your card and have the cash handy, pay it off immediately.
4. Increase your credit limit
Maybe you’re not in a position to pay down your balances. You could take a different approach to improving your credit utilization rate: Call your creditor and ask for a credit limit increase.
If you’ve maxed out your $1,000 card and get a limit increase to $2,000, you’ve instantly cut your credit utilization rate in half. The key is to not spend any of your new credit. It defeats the purpose of getting a limit increase if you immediately charge the card up to $2,000.
5. Open a new account
If your current credit card issuer balks at the idea of increasing your credit limit, apply for a card from a different issuer. It will still help your credit utilization rate, since your utilization rate is based on all your open lines of credit and balances.
So, an individual with $10,000 in credit who owes $5,000 will have a 50% credit utilization rate regardless of whether that $5,000 is on one card or spread across multiple cards.
Be aware, though, that opening multiple accounts at once is not good either. Having too many new accounts can make you look like you desperately want to go on a spending spree. Don’t risk dinging your credit score by applying for more than one new card if you’re going to try this strategy.
To compare credit card offers and find the best one for you, check out Money Talks News’ free credit card search tool.
