If you’ve ever tried to rent an apartment or take out a mortgage on a new home, then you know that your credit score can make or break the approval process. Ditto applying for an auto or personal loan with a desirable interest rate. And if your credit is subpar, credit lenders are less likely to approve your application for a new credit card. And job hunters, beware: even employers may be weighing a prospective employee’s credit history as part of the hiring process.
But don’t despair! The good news is that maintaining or even rebuilding a healthy credit score is well within reach—provided you approach the process with equal doses of patience and consistency. We’ve partnered with H&R Block to highlight five simple ways to optimize your credit score so that a three digit number doesn’t hold you back from living life to the fullest.
1. Understand Your Score
It may sound obvious, but the first step in improving your credit score is to know exactly where you stand. You can obtain a free copy of your credit report every year from all three credit reporting bureaus―Experian, TransUnion, and Equifax―to see just how your credit score adds up. While each of these bureaus calculates slightly different numbers based on their access to slightly different financial info at any given time, the FICO methodology is accurate based on all three.
Creditors care about your credit risk or the likelihood that you won’t repay your loans. This risk is what the credit score is assessing, ranging from 350 at the riskiest end of the spectrum, up to 850 as the least dangerous. The higher your score, the more appealing you are to lenders. Ideally, you’ll fall somewhere above 700 on the scale, which is considered to be within a good credit range.
2. Dispute Any Errors
You’ll want to read your report annually to ensure that there are no errors in the information that credit reporting companies have included. Inconsistencies in your report may include specific amounts owed to lenders, your past addresses or even your SSN, and these can have all negative impact on your score, and in the worse cases, indicate identity theft.
Under the Fair Credit Reporting Act, you are entitled to having these potential errors investigated within 30 days, and corrected when applicable. To do so, you’ll need to send a letter by certified mail to both the reporting company and the lender in question, along with supporting documents. This small hassle is worth it if the resulting fix improves your score!
3. Pay Down Your Credit Balance
Whether you have several small balances on many different credit cards or a few cards with balances hovering above the recommended 30 percent of your credit threshold, paying them off or down will help your score go up. The number of credit cards you have is also a factor in your score. While it can be tempting to spread your charges around, many financial advisors will cringe at this strategy.
Instead, pay off the small balances—but don’t close those cards—and shift your strategy to only using one or two main cards, with those balances kept below that 30 percent level. This technique will help you manage your credit utilization ratio, which takes into account your available credit versus your total credit limits. Keeping your revolving credit as low as possible signals lenders that you’re not living above your means.
4. Make On Time Monthly Payments
Payment history is a top factor in your credit score, so the sooner you get in the habit of making on-time monthly payments, the better. Falling behind on a single payment on a loan or credit card may not seem like a big deal at the time, but once this delinquency gets reported to the credit reporting companies, that negative mark can negatively affect your credit score for up to seven years. The best way to avoid this happening is by scheduling all your monthly payments on your calendar and paying by autopay.
5. Don’t Close Old Accounts
Once you’ve paid off outstanding balances, it can be tempting to cut the card and close that account immediately. But remember that another large factor in your credit score is your credit history, or how long you’ve maintained accounts. Once you get all your accounts in good standing, keep them open so that they work towards building your credit history. On the flipside, don’t open too many new cards at one time, which can signal a risk to lenders and pull your score down.
Remember that building good credit is a marathon, not a sprint. With patience, discipline, and a healthy respect for the power of your credit score, you’ll be well on your way to a score that won’t hold you back from getting approval on that loan or mortgage. And even more valuable, building a good credit score will give you the peace of mind and confidence to be ready for all the life decisions that are on your horizon.
H&R Block believes that healthy finances are the foundation of a healthy and happy life. That’s why for more than 60 years, H&R Block has been the go-to source to help you not just get your taxes done, but get them won. Take the stress out of tax season by learning all the ways H&R Block can help you get the most out of your returns.