Credit scores are a huge part of financial wellness. As I’ve mentioned before on this site, credit scores can impact many parts of your life. Their reach is not just financial- lifestyle choices you make or want to make can be impacted by your credit score.
So what if you have a low score and want to improve it? If you have something like a 480 credit score, you will want to drastically improve it to increase the options you have for yourself.
A low credit score is a hindrance to financial progress. It’s a little sad, but it’s true. Let’s use the example of a 480 credit score. Scores lower than 500 like that means you’ll have a hard time getting a lender to give you any kind of loan, and you’ll pay high interest rates.
Before we get into how to improve your credit score, let’s review the factors that determine what your credit score is.
- Payment history: (35 percent) — Your account payments over time, including any delinquencies like late or missed payments.
- Amounts owed: (30 percent) — The total amount of credit you have currently taken out. If you have a mortgage and student loans that total $400,000 in debt, that’s the total amount you owe.
- Length of credit history: (15 percent) — How long you’ve had open accounts and time since account activity.
- Types of credit used: (10 percent) — The mix of accounts you have, such as revolving and installment. Revolving credit is something like credit card debt and installment credit is something like a mortgage.
- New credit: (10 percent) — How often you open new lines of credit, including hard credit pulls and the number of recently opened accounts.
You’ll find yourself with something like a 480 credit score if you have bad credit habits. Things like consistently missing payments, having multiple hard credit inquiries, or using a huge amount of your available credit each month will bring your score down.
Another important factor for your credit score is something that’s a little out of your control. Lenders like to see a long credit history from potential buyers. Years of credit history give them lots of data to see how dependable you are with making payments.
That means that younger people generally have worse credit than older people, simply because they haven’t had accounts open for as long. If you’re young, it’s even more important to practice good credit habits like paying your bills on time, so that your score doesn’t suffer in any other ways.
Good Credit Habits to Improve Your Credit Score
Now it’s time for the good stuff! How can you bring that score up a few hundred points and do your financial self the best favor?
First and foremost, make payments on time. This is crucial to improving your score. Lenders are primarily concerned with getting their money back, so it follows that making on time payments will help your credit score.
Say you have credit card debt. Even if you can’t pay off the total amount of debt each month, making just the minimum payments will help your credit score. Remember that your credit history matters a lot to lenders. Get a solid six months of on time payments under your belt and you score will improve.
Second, only use the lines of credit you need. Opening a lot of lines of credit within the same calendar year can be a red flag for lenders. It says that you are using credit at a high rate, and might not be liquid enough to pay your bills. Get loans for things that are critical only, not to fund your entertainment.
Third, consider your debt to income ratio. Your DTI ratio should be low, meaning you have more income than debt. If your situation is reversed and you have more debt than income, work to reduce your debt burden. Having a lot of debt makes it harder to pay off any debt, and it hurts your credit score. Decreasing your debt also means you’ll use less of your available credit, which improves your score.
Finally, remember that your credit history matters and don’t close any accounts. Keep your oldest lines of credit open. If you have ten credit cards and want to close a few of them, close the newest ones.
Having a 480 credit score, or anything lower than 500, isn’t a financial death sentence. Work to improve it following these steps and you can see a drastic increase in just one year.
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Kara Perez is the original founder of From Frugal To Free. She is a money expert, speaker and founder of Bravely Go, a feminist financial education company. Her work has been featured on NPR, Business Insider, Forbes, and Elite Daily.