• About
  • Mortgage Basics
  • $40K Challenge
  • Aunt Doris
  • Grandfather Says
  • Privacy
  • Archives

Len Penzo dot Com

The offbeat personal finance blog for responsible people.

The Fastest Way to Improve Your Credit Score

By Sabado Domingo

There are few things in life that follow you the way that your credit does. Your credit score is essentially a score that represents your standing in the business world, and this has a direct impact on many major purchases and loans. Whenever you apply for a loan or a credit line, lenders check your credit rating.

Your credit score determines your risk — that is, your probability of paying back the loan. Lenders use your credit score to determine the interest rates you’re beholden to, the risk premium, and the flexibility of payment terms, assuming that they’d lend you money to begin with. In essence, a good credit score allows you to secure loans on lower premiums and lower interest rates. The better your credit score, the better terms you’re going to have. So, how do you improve your credit score?

Pay Your Bills Promptly

Credit scores are primarily a representation of your reliability when it comes to paying bills — but it also shows your ability to manage your finances. Any late payments and overdue bills reflect on your credit report poorly and the negative information will remain on your credit report for seven years. On the other hand, paying all of your bills on time will improve your credit score.

It’s also important to note that not all missed payments adversely affect your credit score. If you’ve missed a payment for less than 30 days, it’s usually treated as a result of forgetting your due date or getting billed late as long as you pay it off as soon as you can.

Pay Off Debts, Keep Revolving Credit Low

As previously mentioned, any overdue payment will reflect poorly in your credit report; the same holds true for debts. Always pay off your credit card debt, but moreover, it’s also important to keep a low credit utilization ratio. A credit utilization ratio refers to the percentage of your total available credit that you actually use. For example, if you have a credit limit of $10,000 but only use $2000 of that limit, you’re using only 20% of your credit limit.

Lenders typically like to work with borrowers with a credit utilization ratio of 30% or lower. You can also utilize authorized user tradelines to improve your credit utilization ratio as long as the account holder uses credit responsibly.

Open Credit Accounts Only As Needed

Opening a new credit account might increase your overall credit limit — and may also improve your credit utilization ratio — but the act of applying for a credit line prompts a “hard inquiry” on your report; this occurs when a lender, with your permission, reviews your credit report. Too many hard inquiries will adversely affect your credit score. The good news is, they only stay on your record for one year.

Keep Unused Credit Accounts Open

Closing any unused credit accounts hurts your credit utilization ratio. In fact, hurting your credit utilization ratio has a more lasting impact on your credit score than hard inquiries.

Your credit score has a significant impact on your standing in the world of finance, so it should be treated with care in the same manner that you maintain your reputation. It’s really just a matter of keeping your word and paying on time.

Photo Credit: Pixabay

4 Comments January 13, 2021

Comments

  1. 1

    Karen E Kinnane says

    This is another reason for using Dave Ramsey’s “snowball” technique for paying off debts. Dave says, “Pay off the smallest balance first, even if other larger loans have higher interest rates.” As soon as you pay off any loan, even a loan with a tiny balance, your credit score gets higher AS LONG AS YOU ARE PAYING ALL OTHER BILLS ON TIME. Then take the money you would have paid monthly on this paid off loan and make a bigger payment on the next smallest loan. Repeat until you are out of debt. I know, I know, a few of you will say that this is not the best money management, and THEORETICALLY you are correct. But human nature NEEDS reinforcement. Paying off the smallest balance 1. proves to yourself that you can climb out of debt 2. bumps up your credit score 3. frees up that monthly payment amount on the retired loan to add to paying off the balance of the next smallest loan balance.

    Reply
  2. 2

    The Millennial Money Woman says

    Great post Len!
    You’re going to crack a smile – I mentored a few young professionals who said that paying off credit card debt would actually hurt your FICO score… thankfully I was able to help them change that mindset. However, if they truly believed maintaining credit card debt would help their FICO scores, I wonder how many other people believe in this fallacy…

    Thanks for sharing!

    Fiona

    Reply
    • 3

      Patrick Fisk says

      Maybe the same people who think getting a 5 or 6 year car loan is good because you have lower monthly payments.

      Reply
    • 4

      Len Penzo says

      I’ll bet quite a few, Fiona.

      Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Polls

Will you close your savings accounts if the banks go to negative interest rates?

View Results

Loading ... Loading ...

Recent Posts

  • Should You Consider A Pre-Settlement Loan In a Personal Injury Case?
  • What Barfing Out of a Bus Window Teaches Us About Managing Money
  • 7 High-Paying Tech Jobs That Desperately Need Women
  • 9 Important Strategies to Help You Manage Financial Risks
  • Black Coffee: Parasites and Leeches
  • Responsible Casino and Gambling Tips: How to Stay Within Your Budget
  • Starting a Side Hustle? Ask Yourself These Questions
  • Grandfather Says: A Chicken Run for the Henhouse
  • 6 Basic Steps to Help You Achieve Financial Freedom
  • 5 Ways Smoking Negatively Affects Your Personal Finances

Disclaimer

This site is for informational and entertainment purposes only, and the content herein should not be mistaken for professional financial advice. In fact, making investment decisions based on information published here, or any other website for that matter, is more than unwise; it is folly. This website accepts advertising in the form of monetary and other compensation; as such, topics of discussion are occasionally influenced by these advertisers. Sometimes, an article may also include affiliate links, meaning, at no additional cost to you, this blog earns a commission if you click through and make a purchase (for example, as an Amazon Associate I earn from qualifying purchases). Remember, you and you alone are responsible for the decisions you make in life, so please contact an independent financial professional for advice regarding your unique personal situation.

Sign up for the weekly Len Penzo dot Com newsletter
Len Penzo dot Com Delivered Weekly
Join more than 30,000 readers and fans who enjoy personal finance and macroeconomics with an offbeat twist!
Invalid email address
Thanks for subscribing!

Popular Now:

  1. 1. 25 Examples of Shrinkflation That No Longer Fool Consumers
  2. 2. The 10 Worst Things I Ever Bought
  3. 3. 7 Perplexing Money Questions Without a Good Answer
  4. 4. My Cola Taste Test: Is Coke Really Better Than Pepsi?
  5. 5. The Real Secret to Becoming Rich as a King
  6. 6. Planning a Wedding? Here Are 9 Ways to Ensure You’ll Pay Too Much
  7. 7. The Big Secret the Banking Industry Doesn’t Want You to Know
  8. 8. 5 Things Nobody Tells You About Being Poor — for Good Reason
  9. 9. A Simple Test to Know If It’s Better to Rent or Buy a Home
  10. 10. 4 Good Reasons Why Some Quarters Are Painted Red

All-Time Most Popular:

  1. 1. 19 Things Your Suburban Millionaire Neighbor Won’t Tell You
  2. 2. Dear Friend: Here Are 41 Reasons Why I’m NOT Lending You the Money
  3. 3. Why Your Expensive Luxury Car Doesn’t Impress Smart People
  4. 4. If You Can’t Live on $40,000 Annually It’s Your Own Fault
  5. 5. 21 Reasons Why Corner Lots Are for Suckers
  6. 6. 4 Smart Reasons Why College Isn’t for Everyone
  7. 7. 18 Fast Facts About Social Security Numbers
  8. 8. My Ketchup Taste Test: Upset! Guess Which Brand Topped Heinz
  9. 9. Why I Prefer a Spreadsheet to Track Expenses and Manage My Finances
  10. 10. Here’s a Simple Trick for Getting Credit Card Interest Charges Waived

Copyright © 2021 Len Penzo dot Com · All Rights Reserved · Designed by Nuts and Bolts Media

© Len Penzo dot Com 2008–2021