How Can I Improve My Low Credit Score?

A significant number of Americans have a low credit score or no score at all. This can create problems in everyday life, such as when you need to rent a home, pass an employer’s background check, or open a utility account. And, of course, having poor credit or no credit history also makes it harder to get approved for a personal credit card or loan. People with low credit scores may not be able to obtain traditional financing for things like a car purchase, forcing them to accept high interest rates and other unfavorable terms from non-traditional lenders. If you’re aiming to improve your credit score, this article will help you understand how credit scores are calculated and what you can do to raise yours. 

Key Takeaways:

• A credit score is a three-digit number that reflects your credit history.
• The FICO® Score is the most commonly used credit scoring model.
• The higher your score, the more likely you are to be approved for credit and receive favorable interest rates and other terms.

How can I improve my credit score?

The good news is that the lower your score, the easier it is to raise it through simple first steps. To get on your way to a higher score, you need to understand how credit scores are calculated.

Credit scores typically range from 300-850 with 680-700 generally considered the baseline for a good score. The primary factors used to calculate credit scores include:

• Payment History: Have you made loan payments, credit card payments, and other bill payments on time? If not, this is a good first step to take.
• Credit Utilization: This measures the amount you currently owe vs. your total credit limit. Generally, you should aim to keep your credit usage below 30%. So, another first step would be to calculate your own credit utilization and make extra payments on your balances to get below 30%.
• Length of Credit History: The age of your oldest and newest credit accounts, plus the average age of all accounts.
• Credit Mix: The variety of different types of credit accounts you have such as credit cards, term loans, mortgages, and more.
• New Credit: Opening more than one new account in a short period of time can hurt your credit score.

Now that you understand what goes into a credit score, let’s look at the concrete steps you can take to improve a low credit score. 

Check your credit score and credit report

There are many ways to access your credit score. If you have a credit card account, you may be able to access your FICO® score for free as an account perk. You can also purchase a credit score report from the major credit reporting bureaus. Another option is to use one of the free credit score apps like Credit Karma and Credit Sesame to view an estimate of your current score. 

Once you have your score, you’ll know where you stand and where you are starting from. Next, grab a free copy of your credit report. Checking your credit score will help you identify the areas in which you could change your financial habits to improve your score. And you want to check your credit report for any errors or issues that need to be reported. Correcting errors on your credit report can also increase your score when resolved.

Tackle credit card debt strategically

If you have outstanding credit card debt, you can positively impact your credit score by paying it off in a timely manner. Aim to utilize less than 30% of your credit limit each month, which makes it easier to pay off each month. This will also save you money in the long run by decreasing the amount of money you'll need to spend on interest payments. Paying off credit card debt will quickly affect your credit score. 

You don’t even have to pay off the entire balance at once to make a difference–every little bit helps. Pay more than the minimum as much as you can or make one-time extra payments. For example, you could sell unwanted items in your house and put the proceeds toward your credit card debt. 

Identify your outstanding debt

Look over all of your outstanding debt balances including car loans, mortgage loans, credit card balances, and more. Make a list and figure out exactly how much you owe. Once you have this information, you can formulate a plan to tackle your debt. You don’t necessarily need to worry about paying off secured loans such as mortgages and auto loans early if the interest rates are pretty low. Instead, use the avalanche or snowball methods to pay off higher interest debt such as credit cards and unsecured personal loans and lines of credit:

• Snowball: Start with the lowest balance, regardless of interest rate, and throw all your extra money at that account while making minimum payments on everything else. Once the first account is paid off, celebrate your momentum and move on to the next-lowest balance.
• Avalanche: Conversely, this approach has you starting with the highest interest rate, regardless of balance, and paying off that account first before moving onto the next-highest rate. The idea is that you’ll save more money on interest in the long run.

Utilize online bill pay

If you struggle to stay on top of your bills, enrolling in a bill pay service can be a helpful way to schedule payments in advance and manage your bills all from one spot. Sleep easy at night knowing you won’t forget a due date again. Many financial institutions, including Town and Country Bank and Peoples Prosperity Bank, offer Bill Pay through their digital banking services. For one-time and recurring bills, you can schedule payments in advance, set up reminders, and enjoy the security and convenience of eliminating paper clutter.

Increase your credit limit

Another way to improve your credit utilization ratio is to increase your total available credit. Contact your credit card companies to see if they will raise your credit limit. Just keep in mind that this strategy doesn’t actually reduce your total debt. So, increasing your credit limit should be used alongside the snowball or avalanche method for chipping away at your outstanding balances.

Get help improving your credit score from Town and Country Bank and Peoples Prosperity Bank!

Our bankers are the best of the best and offer a comprehensive suite of innovative products and modernized services—all with a hometown touch. Check out our balance transfer credit card offers, debt consolidation loans, auto loan refinance, and mortgage refinance. We also offer Online Financial Management with your digital banking account. OFM can help you stop living paycheck to paycheck, get out of debt, and save for a rainy day. Have questions? Stop by any conveniently located branch or call our Customer Service Solution Center.