Your credit score plays an important role in your financial life as it is an important metric for financial institutions to determine whether or not they can lend you money. It also defines the interest rate at which they lend you money. Whether you are buying a house, a car or even applying for a credit card, your credit score and report are checked thoroughly before approval. Most of time you will need to improve your credit score before considering applying for a loan.

While there are many factors that affect your credit score, one can take safe measures to prevent it from decreasing significantly and improve it. Factors such as those mentioned below are taken into consideration for the analysis of your credit and mortgage application.

• Credit Balance
• Credit Limits
• On time Payments
• Number of accounts
• Application for credit

The general rules to keep a clean report is to control your spending and always pay the minimum owed on time. Here are some other ways you can improve your credit score.

1. On Time Payments

Minimum payments makes up 35% of your credit score. For this reason, it is very important to always pay on time the minimum amount and never miss a payment. In fact, if you fail to make the minimum payment for any reason, not only your credit score will take a hit by several points but also most lenders will increase your interest rate by up to 50%.

2. Reduce your credit utilization

If you are trying to improve your credit score, you need to seek ways to reduce your credit utilization as much as possible by making good payments. Indeed, credit utilization makes up 30% of your credit score. A general rule of thumb is to keep your credit utilization below 30%. For example, if you only have one credit card with a credit limit of $5,000, try to keep the balance less than $1,500.

Increasing your credit limit does not mean you can spend more. You will need to control your spending if you want to improve your score!

3. Increase your credit limit

While this step may seem confusing, it is indeed beneficial to increase your credit limit if you want to improve your credit score. We mentioned at step 2 that your credit score depends heavily on your credit utilization. Increasing your credit limit will decrease your credit utilization hence increasing your credit limit. For example, if you owe $3,000 on a $5,000 credit card, your utilization is 60%, well above the 30% threshold. However if you increase your limit to say $10,000, your utilization will decrease to 30%.

4. Transfer balance to lower interest credit cards

Transferring balance to a credit card with lower interest is an excellent strategy to improve your credit score. Transferring a balance allows you to pay more the capital on your credit card and less the interest. For example, if you owe $5,000 on a $10,000 credit card at 24.99% APR and you pay the $300 each month, $104.13 per month will go to pay the interest and the remaining $195.87 will go towards decreasing your credit balance. If you transfer the balance to a credit at 2.99% rate, you will only pay $12.45 per month in interest and the remaining $287.54 will go to lower your credit balance! If you don’t how to transfer a balance or which cards to use for balance transfer, we post an article on top 5 credit cards for balance transfers.

5. Do not apply for credit for one year

When you apply for credit, lenders usually do a hard inquiry of your credit report and this will make you lose 20-40 points per inquiry! Unless you really need to apply for credit and it is your only choice, do not apply for credit for a period of at least one year. This in combination with high payments will significantly improve your credit score!