Trying to clean up your credit score just before applying for a loan is a lot like working out to get 6-pack abs just a few days/weeks ahead of your beach vacation!
Such shortsighted efforts won’t be good enough to undo months of reckless mistakes. However, people who know how to discipline themselves and who can get into the habit of making well-informed decisions, can definitely see some improvements. That sort of discipline is all the more important for people who’re about to apply for a loan within the next 2-6 months.
While there are some tried and tested methods that can help you build a long-lasting healthy credit score, you can also make some small-small changes into your credit card habits right away and see an improvement in your score in some time.
Just by changing the frequency and timing of your monthly payments, apart from using the right credit cards for your purchases, can lift up your score by around 20 points or even more, in a matter of two months! The extent of improvement will depend on your present financial habits and some other factors. Following are some useful ways in which you can use your credit cards to improve your credit score:
Pay your monthly card bills on time
This is easily the best thing you can do to improve your credit score. The payment history of your credit cards carries a 35% weightage in calculation of your FICO score (used by most lenders). That weightage is higher than any other factor that makes up your credit score. So, ensure that every credit card of yours is paid on time, every month.
Keep your account balances low
The amount of money you owe on your different credit cards carries the second biggest weightage (30%) in calculation of your FICO score.
A good way of understanding this factor is by paying heed to something known as credit utilization ratio. This ratio is the percentage of credit you’re actually using, from the total credit available to you. For instance, if the total credit limit on all your credit cards combined is $ 20,000 and you currently carry a collective balance of $ 4000 on them, you’re using 20% of your available credit.
Normally, people pay off all their cards in full, or to the maximum extent possible, to keep this ratio closest to zero. However, anyone who can’t afford to keep a zero balance must ensure that his/her credit utilization ratio is well below the 10% mark. At any cost, he/she should never exceed 30%.
And that applies to all of your cards. Many times people who’re looking for a loan in the near future, opt for balance transfer cards for bringing their card balances well below the 30% threshold, but they often do so without paying heed to the balance transfer fees involved. This fee can be 3% or more, often resulting in a fee amount that may not be worth paying for a credit score boost.
Make frequent payments
Paying your credit card bill only once every month may not be good enough for improving your credit score. The balance appearing on your credit report is normally the balance from your last statement/s. And people running up high balances on their credit cards may get penalized in terms of their credit score, even if they do clear those balances in full every month.
For instance, if a person makes a $ 5000 purchase on a credit card (with $ 10,000 credit limit) in a specific month, his/her credit report may still show him/her as having used 50% of his/her credit limit on that card, even if s/he pays that card in full by the end of the month.
Such records may not matter much to someone who isn’t planning to apply for a loan anytime soon, but for an individual preparing himself/herself for a credit check, they may make or break the deal. Hence, it’s always better to make multiple credit card payments every month as and when you use your cards.
Put your credit cards to use
Although you should never run up your credit card balances to the extent that you can’t afford to pay them in full, you can’t help using your cards if you want them to be counted as a part of your payment history either.
It’s not necessary to use your cards every month, but make sure that you use them every once in a while, so that there are records of purchases and their timely payments. Furthermore, there is a risk of card issuers cancelling the cards that haven’t been used for many years. A cancelled card can reduce your total available credit, putting a dent into your credit score.
Keep your oldest accounts
Although it may seem tempting to get rid of your old credit cards that you’ve rarely used, people wanting to apply for new loans should hold onto such cards until the completion of their credit checks. Closing a credit card automatically reduces the total available credit to you. Such a step can be even more detrimental if you’re carrying hefty balances on some of your other credit cards, as it can increase your credit utilization ratio. However, such dips are only temporary in nature, and the credit score normally rebounds in the next few months as the credit agencies discover that you’ve actually not taken on more debt. But, even if temporary, such dips can indeed become the cause for loan rejections. So, avoid closing any credit card if you’re planning to apply for a loan in the next 2-6 months’ time.
Keeping or closing the old card accounts can also impact the length of your credit history, which carries a 15% weightage in your FICO score. Nevertheless, the impact is most likely to be minor in nature. Moreover, if you’ve been paying those cards in full every month, your credit score may not drop at all by their closure.
Following these basic suggestions, you can effectively use your credit cards to improve your credit score. Last but not the least, check your credit history at least once every year to ensure everything is in order and all the information in it is correct.