But first: How are credit scores calculated?
‘Scoring models’ analyze one of your credit reports from Equifax, TransUnion, for Experian to determine your credit score. These computer algorithms use varied factors or give different weights to the same elements to determine your score. Despite these differences, though, they are alike in many ways:
- Scoring models work by predicting the likelihood that you will be 90 days late on paying a bill in the next two years (24 months).
- The higher your score, the less likely the model thinks you will fall behind on payments, and vice versa.
- Most lenders rely on credit scores that are calculated using the VantageScore or FICO scoring models. FICO also creates scoring models specific to certain industries, such as card issuers and auto lenders.
- Even though there are different scoring models, they all pretty much used the same underlying information in predicting an outcome. So the steps you need to take to improve one of your credit scores can ultimately help increase all your scores.
Seven steps to improve your credit score all by yourself
1. Build a solid credit file.
The first foundational step to building a good credit score is to open new accounts that major credit bureaus look at when calculating your creditworthiness. Making your credit file will help you lay down a track record as a borrower and demonstrate that you are a responsible payer.
If you’re starting out or your score is relatively low, open secured cards or credit-builder loans. If you already have a pretty good score but want to improve on it, open a rewards credit card with zero annual fees.
It might also help you get added on someone else’s card as an authorized user (assuming that the principal holder uses the card responsibly).
2. Never miss a payment.
Credit reporting agencies look at your payment history when determining your score. Establishing a long and reliable record of on-time payments is the key to achieving excellent credit scores that may help you get lower interest rates and better terms on your investment property loan.
Make sure you never miss a credit card or loan payment by more than 29 days. This is because payments that are 30 or more days late are reported to credit bureaus, ultimately hurting your score.
Many experts recommend setting up automatic minimum-amount-due payments to ensure that you never miss a bill. You can pay more than the minimum, of course; this is just a tool to ensure that you don’t forget to make payments on schedule.
If you can’t afford to pay a bill for some reason or another, reach out to the lender right away. They may be able to suggest hardship options.
It’s also a good idea to stay on top of subscription services, gym memberships, and other accounts that generally don’t appear on credit reports. Even though paying them on time won’t help your score, you don’t want any of these accounts to be sent to collections—because that could cause your scores to plummet.
3. Bring all your bills current.
Are you behind on some of your bills? Make it a goal to catch up on all your past-due accounts. Late payments can stay on your credit report for many years, so it’s crucial to have all your accounts current if you want to improve your score. This also ensures that no further late payments or additional late fees are added to your credit history.
Those who are having a hard time catching up on credit card debt have the option to talk to credit counselors who can put them on a debt management plan. Credit counselors may be able to help negotiate lower interest rates and monthly payments on their behalf and convince lenders to bring their accounts current.
4. If you have revolving account balances, pay them down.
Even if you pay on time and don’t have any past-due accounts, maintaining high balances on revolving credit accounts can hurt your score. This is because a high balance increases your ‘credit utilization rate,’ which is a huge factor in determining your credit score.
You want to make your credit utilization rate lower—meaning you want your balance to be low relative to your credit limit. People with high credit scores tend to have utilization ratios that are in the low single digits.
5. Don’t apply for too many new accounts.
While it’s crucial to open accounts if you want to build your credit file, it’s also important to limit how many credit applications you submit. You may inquire about each application, and when these add up, they may have a compounded negative effect on your credit standing. Opening new accounts rapidly can also potentially decrease your accounts’ average ‘age’, thereby hurting your score.
An exception is when you go rate shopping for auto loans or mortgage loans. Scoring models don’t interpret rate shopping as risky behavior and generally ignore them.
6. Make sure that there are no errors on your credit report.
Get your credit report from all credit reporting agencies and check them for any incorrect information. Did you find any accuracies or missing information? Dispute them by contacting either the reporting agency or your lender. Don’t worry—check your FICO score or credit report does not affect your credit score.
7. Reduce your overall debt.
Cleaning up your debt won’t just help your credit score but also prepare you for the financial responsibility of owning and running an investment property.
Make it a goal to pay off as much debt as you can—incredibly high-interest credit card debts. There are plenty of resources and tools online about creating a payment plan that can help you put most of your income towards paying down your highest interest loans first while making minimum payments on the rest of your accounts.
You can also quickly download budget templates that will help you take better control of your income and plug any financial drains that may be causing you to lose money to unnecessary spending.
By making it a priority to get your financial house in order, you’re putting yourself in a better position to become a successful investment property owner.