Improve Your Credit Drastically

Improve your credit score.

If you’re in a rebuilding stage for your credit, you may be frustrated with wondering how you can improve your credit.  If you’re looking at needing to use credit in the near future, you may be interested to know some of the best ways to boost your credit quickly.

Some ways of improving your credit are obvious—make payments on time, keep your balances low, and so on.  But there are some lesser known ways to boost your credit score depending on the timeline you need it.

If you need your credit boosted faster, there are only a couple of options open. You should plan your financial goals out in advance wherever possible. This way you know when you’ll be needing credit in the next few years. Maybe you want to buy a house, a car, or to start investing in your own business or rental property. Whatever it is, you can start taking steps sooner and make more strategic moves when you plan ahead.

Improve Your Credit Quickly

Pay Down Balances

One of the most obvious ways to boost your credit quickly is to pay down your balances aggressively.  This may seem obvious, but I want to emphasize it because it’s also great for your finances in general.  It’s not sexy, but it has so many benefits. You’ll get closer to a no-debt lifestyle and decrease the amount of interest you pay every month.

You can pay off your balances by working off the smallest debt first. That will free that payment amount up every month. You can then debt snowball and work on the next bill. Or, you can opt to go for the debt with the highest interest rate. That’s debt avalanching and will save you the most money long-term.  Both are excellent options.

Increase Credit Limits to Existing Lines of Credit

A lesser known option for improving your credit quickly is to request increases to your existing credit lines. This works if you make your payments on time and use those cards. You can generally ask for an increase every 6 months or a year, which means this tip is repeatable.

The worst they can do is say no, right? But if you’re successful, it’ll both increase your available credit and reduce your debt-to-credit ratio.

To do this, use your web browser to navigate to your lender’s website and log in to your account. I find that most apps do not have a process for this.  Every lender’s website is set up differently, but you’ll usually be looking for options to request a credit limit increase.  You may have to call your lender to make this request.  Some lenders will have you complete a form and send it in to them for review.  Complete any forms and then simply wait a few days for a response.

Here’s how this works.

Let’s say I have $8,000 in available credit, and I’m using $2,000 of that credit. In this scenario, I’m using 25% of my available credit–this is my debt-to-credit ratio.  Now, if I convince two of my revolving credit lenders to increase my credit limit by $1,000 each, I’ve increased my available credit by $2,000. At that point I’ll have $10,000 in available credit, and my new debt-to-credit ratio is 20%.  That’s a pretty great improvement for a few minutes of work!

You may be wondering if these changes will negatively impact your score by way of a hard credit inquiry. 

Usually the answer is no. Most lenders will give you a notice on their website about whether your credit increase application will impact your credit score. However, you may not be able to find that information during the application process. In that case, I strongly recommend that you call your lender and ask over the phone before submitting your application.

Improve Your Credit Over Time

Let’s say you’ve done some financial planning and you plan to buy a big ticket item in a couple years. Now you have some more options. Some of them may give you a smaller hit to your credit in the short-term. But then your credit has time to bounce back and then improve dramatically over a period of time. This can take anywhere from just a few months, up to a year or two.

Get a Small Loan and Pay it Off Quickly

You can give a smaller boost to your credit by taking out a small loan and paying it down rapidly.  The loan will appear as part of your credit report for up to 7 years after you pay it off.  This improves your credit mix if you haven’t had a loan in a while.

Do this the smart way. I recommend saving the entire amount of the loan you wish to take and then paying it off quickly with those cash reserves.

For example, let’s say you want to buy a car, and the cost of the car is $15,000.  You would want to have the $15,000 saved ahead of time before the purchase. Then you could put $13,000 down and finance the remaining $2,000. Since you already have the $2,000, it’ll be a stress-free way to boost your credit. The caveat here is that you will have a little interest to pay. This is why I recommend paying it off quickly.

If you pay off the car in just a few monthly installments, the interest you pay will be minimized. This is in addition to helping your credit mix. And, you’ll have more of the favorable data you want appearing in your credit report.

Just be sure to check with the lender to ensure there are no penalties for paying off the loan early.

Open a New Line of Credit

It may be counter-intuitive to open a new line of credit when trying to improve your credit. It’s easy to understand why. After all, the immediate impact to your score is actually negative.  You’d usually want to avoid hard credit inquiries and reducing your average credit age.

However, if you don’t anticipate needing to use your credit in the next couple of years, this can be a smart move. It does the same thing as upping your existing lines of credit. That is, it’ll provide more available credit and reduce your debt-to-credit ratio.

Over a couple of years, your new accounts will age appropriately. That in turn will reduce the sting to your score. And bonus, you’ll have more opportunities to ask for increases to those lines of credit. Remember that you can do that every six months to a year.

Generally speaking, after two years the hard inquiries will drop off. Your recency rating will be restored good as new.

The trick to this one is to manage your new credit line wisely. Either don’t use the new accounts at all, or to use them for minor purchases and pay them off immediately. Not using the card will reduce your chances to get increases, since credit card companies like to see you using their cards.  The latter will allow you better luck in asking for increases to your credit limit in the future. But, if increases aren’t on your mind, it’s better to simply not use the card.

You can also sometimes transfer balances from one of your old cards to a new card. The new card should offer a lesser interest rate for a period of time, ultimately saving you some interest.  It’s a nice bonus to this method.

General Credit Maintenance

Don’t forget that there are some general rules of thumb you want to follow when looking to maintain or improve your credit score.

Payment History

Make payments on time. This is usually one of the largest factors in any credit score.   If you know you are going to be late or are struggling between jobs, call your creditor. Explain your situation.

Creditors are typically happy to work with you if you have a good track record with them. If you let them know you are worried about maintaining your credit, they will likely help you. They may delay credit reporting for a period of time or reduce your minimums.

Credit Usage

If your credit is really bad because you have overextended yourself, you must focus on aggressively paying down debt.  Make a commitment to not using your credit until you hit your debt or credit goals.

For example, you may decide not to use any credit until your debt is fully paid off. Or perhaps until your total credit usage is under a specified dollar amount.

You may even find that you break your credit habit during that time, which can only be good for you.

Once your debt is paid off, keep your balance to a limit that you can pay off in one month.  For example, if you can apply $200 to debt every month, you should keep the total of all your balances on all your lines of credit to $200 or less.

Credit Mix

Take loans only when you need them. Wherever possible, save up for the item and limit the amount you need to take out on a loan.  Larger down payments are essential, and if you can save for the entire cost, this is better.  Take out a loan and pay it off early using the money you’ve saved in your account. This will reduce the amount of interest you pay.

I recommend only having two or three lines of credit in use at any given time. They can be all loans, one loan and a credit card, or all cards. Whatever mix you use, limit the number of payments you have to pay.  This means that if you run into financial hardship you can fall back on fewer minimum payments each month.

It also means if you end up using a lot of debt, and you are ready to start paying it down, you can apply more of your debt payment each month to the principal and less to interest.

Credit Age and Recency

Make sure you are never closing any lines of credit, even if they are lines you no longer wish to use.  This maintains your average credit age and improves the longer the account is open.  Just because you have a line of credit doesn’t mean you have to use it!

Only open accounts as you need them. Or, strategically open a new account or two if you know you won’t be needing your credit in the next two years This is the same as we talked about above.

Create a Financial Plan

Overall, having a plan for your finances will help ensure that you have good credit scores when you need them.

Plan for car replacements a couple of years before you need them; plan moves and large purchases well in advance of actually making them; and keep an eye on major upcoming expenses in general.  Investing in appropriate insurances will help you protect those plans.

Where most of us get into trouble is that we try to wing our finances. That never seems to work out.  Even if you don’t follow your plan to the letter, following a plan even 90% of the time is a great way to get a handle on your debt and take control of your financial life.

What are some other tips you would add to improve a credit score, either quickly or over a period of time?

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