As we have finally said goodbye to 2020 with mixed emotions, let us welcome the year 2021 with renewed vigor and enthusiasm. Let us make 2021 a year where we accomplish not only our physical and professional goals but also financial goals. When we are focusing on our financial goals, we must talk about our credit scores. This article will take you through 21 exciting ways to improve credit score in 2021!
For all beginners, a credit score is a number that represents the information present in your credit report or file. Your lenders look at your credit report to evaluate your creditworthiness, that is, whether you should lend money or not.
Your credit score depends on five main factors. When you check your credit report and score, find out how well you are handling each of these five factors and what more you can do to make adjustments for the better.
So, here are those five main factors:
Your payment history accounts for almost 35% of your credit score. Hence, paying your credit bills on time should be one of your top-most priorities.
Credit Utilization Ratio
Your credit utilization ratio is the percentage of your available credit on credit cards and other revolving accounts that you are using at any given time. The lower your debt balances compared to your maximum credit limits, the better your credit score. The credit utilization ratio contributes to 30% of your credit score.
Length of Credit History
How long you have been availing of credit and the average age of your credit accounts contributes to about 15% of your credit score.
Credit mix refers to having multiple types of credit on your credit report. It shows that you have a broad capability to manage your debt well. It makes up almost 10% of your credit score.
New Lines of Credit
The last 10% of your credit score is determined by your new credit accounts. If you are applying for multiple credit accounts in a short time period, it could have a negative effect on your credit score.
Now that you know what a credit score is and the factors underlying it. Let us focus on ways to improve credit score in 2021. We have found out 21 practical and effective ways to improve credit score in 2021. Here they go….
1. Pay Bills on Time, Every Time
As we have seen in the five underlying factors, the most important factor that affects a credit score is payment history. So, missing out on payment due dates can significantly downgrade your credit score. To ensure that you never miss out on the payment due date, you may put your bills on autopay. However, do make sure that you have enough amount in your checking account to sufficiently cover your bill every month. When you know that you are protected against a dip in your credit score due to missed credit bill payments, you can now focus on other ways to improve your credit score in 2021.
2. Keep Your Credit Utilization Low
The second-most important factor in a credit score is the credit utilization ratio i.e. how much revolving debt you have as compared to your credit limit. You cannot utilize your credit card to the fullest and still have a good credit score. According to credit experts, having a credit utilization ratio less than or equal to 30% of your credit limit can substantially enhance your credit score.
In the year 2020, users witnessed a significant reduction in their credit card balances which further reduced their credit utilization ratios. This led to a record-high average credit score in the US.
You can strive to pay-off high-interest credit card debt such as auto loan and education loan first. As you start paying off your credit card balances, it is a sign for potential lenders that you’re worthy to be lent more credit.
3. Get Yourself a Credit-Builder Loan
If you wish to build your credit score from the scratch or you are trying to recover from a bad credit score, you may take a credit-builder loan from a credit union. A credit-builder loan requires you to make fixed payments for six to 24 months. Later, your money gets transferred to a savings account, which you will be able to access at the end of the term of the loan. During the loan term, the lender reports all your timely payments to the credit bureaus, thereby strengthening your credit score.
4. Buy a Secured Credit Card
Another way to improve your credit score in 2021 is to get a secured credit card. A secured credit card requires a cash deposit somewhere in the range of $200 and $3,000. This cash deposit then becomes the credit limit.
A secured credit card works just like any other credit card. The cash deposit acts as a safeguard in protecting the card issuer from any default in the payment that you might probably make. If you use a secured credit card properly, you could soon upgrade to a traditional unsecured credit card down the line.
5. Become an Authorized User for Another Credit Card Account
Joining a trusted family member’s or close friend’s credit card account as an authorized user can be a good way to improve credit score in 2021. You can use that card for your purchases just like your own card, and the payment history for this card will get reflected in your credit report. You can choose an appropriate ally whose credit can help you improve your credit score.
6. Review Your Credit Report for Any Errors
You can pull your free credit report from each of the three credit reporting bureaus namely, Experian, Equifax, and TransUnion on AnnualCreditReport.com. Check each of them carefully for any errors in outstanding balance, current loan amount, or timely payments. If you find any error in the credit report, you can file a dispute with the appropriate credit bureau. That could probably lift your credit score.
7. Don’t Close Your Old Bank Accounts
You can provide a boost to your credit score by leveraging your long credit history and a high total credit limit. To do so, you may have to keep your old accounts operational even if you don’t use them. Closing old accounts can reduce the average age of your accounts, have an immediate effect on your credit utilization rate, and that can negatively impact your credit score.
However, if your old credit card has a high annual fee, then maybe doing away with that account could be a better option. You may even ask your issuer to replace that card with a card that has a lower annual fee, if possible.
8. Don’t Open New, Unnecessary Credit Lines
You may be eyeing that new credit card in the market. But when you apply for a new credit card or loan, a hard inquiry may appear on your credit report. This can probably take your credit score down. Thus, think wisely before you apply for any credit card or loan. Go ahead only if you truly need it and only if you think you will qualify for the same.
It is better to avoid multiple hard inquiries and new loans that may be difficult for you to repay. This is one way to improve credit score in 2021.
9. Don’t Make Too Many Loan Applications in a Short Time Period
Loan applications usually lead to hard inquires. Too many hard inquiries in a short time could be a signal to the lenders that you are applying for a lot of credit, which you may not be able to repay.
However, smart borrowers apply for the same type of loan to compare the rates offered by different lenders. Sometimes, credit rating firms tend to consider multiple hard inquiries of the same type of loan applied around the same time period as one. In that case, your credit score won’t be hampered due to too many loan applications.
10. Clear Your Credit Card Balance Monthly
Make it a habit to pay off your credit card balance every month without fail. That will reduce your existing debt. Clearing out your credit card debt balance each statement period can even keep your credit utilization low and can also protect you from incurring additional interest charges/ penalties. Thus, it is one way to improve credit score in 2021.
11. Keep Checking Your Credit Score Frequently
By keeping a track of your credit score, you can quickly identify if there is any drop in the credit score and can take corrective steps to address the drop. You can extract your credit report for free from any of the three credit rating firms to check your credit score.
You can find out different ways to improve your credit score and to address factors that influence your credit score. As we have seen earlier, a few of those factors are high debt balances, late payments, or too many hard inquiries.
12. Stay Vigilant to Avoid Credit Card Fraud
Credit card frauds can happen to anybody. Thus, it is quintessential for you to protect personal information from fraudsters. Identity theft, that is, when fraudsters steal your personal information to open bank accounts in your name or to conduct transactions through your existing accounts, can severely impact your credit score. Here are a few handy tips to safeguard your credit card from fraudsters:
- use a password manager to create and store unique passwords
- don’t use public Wi-Fi networks to make financial transactions
- don’t speak out your passwords while in a public area
13. Maintain a Healthy Credit Card Mix
The lenders would want to see a mix of accounts in your credit file. Having a mix of credit accounts could be evidence that you can manage a variety of credit types. For instance, student loans, mortgages, and auto loans are all installment loans that involve a fixed payment whereas a credit card or home equity line of credit is an example of revolving credit with variable payments.
Presently, if you have a single type of credit in your credit file, you can consider adding something different to it to improve your credit mix. Having said that, credit mix contributes to just 10% of your credit score. Thus, think carefully before applying for new lines of credit if you are doing it just to improve your credit score. That can put you at risk of taking on debt you can’t repay.
14. Make a Budget
Take some time out in 2021 to create a budget for yourself. It will help you pay off your debt and keep your spending in check. It becomes even more essential if the pandemic of 2020 has left you financially exhausted.
Maintaining a budget will give you clarity on the amount you are earning and how much you can safely spend on discretionary items. You will then tend to make smarter choices. Even when you’re tempted to use your credit card, you will refrain from doing so, and that can help you keep your credit utilization low.
15. Take the Help of a Non-Profit Credit Counseling Agency
If you have no prior experience in setting up a budget or managing debt, a certified credit counselor at a nonprofit agency can help you in doing so. You can get a free initial consultation from them regarding debt management plans and budgeting.
16. Don’t Fall Prey to Credit Repair Scams
You will come across companies that will claim to improve your credit score by removing negative information from your credit report for a fee. But the truth is that no company can legally erase information from your credit file if it is accurate. Therefore, don’t spend money on such credit repair scams. Instead, take honest steps to improve your score by paying off your debt on time and reducing your debt balance.
17. Leverage Your Mortgage, Utility, Rent, and Other Bill Payments
If you regularly pay your bills on time, you can consider adding those payments to your credit report. This can be one of the ways to improve credit score in 2021. Prompt bill payment being reported in your credit report represents positive information about your credibility.
For instance, you can link your rent payments by signing up with a service like Rentrak or PayYourRent. In many cases, getting your landlord or property management company on board can reduce the fees you will have to pay.
18. Take the Help of a Cosigner While Applying for a Loan
Making on-time payments toward an installment loan can help build a credit history. Not just a credit-builder loan but also a traditional one such as a car loan can add positive information to your credit report and can improve your credit mix.
However, if you can’t qualify for a loan on your own, you take the help of a cosigner but make sure that the cosigner knows what he/she is getting into. If you can’t afford to repay the loan, it will become his/her responsibility to do so.
19. Plan to Resume Paying Loans
If you’ve taken advantage of relief measures passed in the Coronavirus Aid, Relief and Economic Security (CARES) Act, such as student loan or mortgage forbearance, you may start preparing to resume those payments. Get in touch with your respective lender to understand modified repayment terms, if any. If the payment terms have been modified, you can review and reconcile your budget to fit the new terms. You can reduce your discretionary spending or start generating an additional source of income to pay off your debt on time and in full.
20. Patience Is the Key
You cannot improve your credit score overnight. It takes years to build an excellent credit score and it is a result of credible financial behavior. There may be businesses out there that may try to lure you by promising an immediate improvement in your credit score. Beware and don’t fall prey to such businesses!
Few strategies adopted by you may help you see small improvements quickly; however, getting your dream credit score may still be far-fetched.
Looking at the financial havoc caused in 2020, keep doing what you are doing to keep your credit score intact or improve it further. Refrain from adopting ways that may make it difficult to increase the credit score.
21. Leverage the Experian Boost Tool
The Experian Boost tool can help you add on-time phone, utility, and streaming payments to your credit report. This could probably lead to an increase in your credit score. The tool is free of cost but will affect only your Experian credit report and scores. It has been observed that the average Experian Boost user sees an improvement in their credit score by about 13 points.
Now that you know the 21 ways to improve credit score in 2021, go get the best credit score that you have always dreamt of!!!
All the best…Let’s together make 2021 an amazing year!!
For more such articles on finance-related topics, you can have a look at Financeshed.
Stay tuned and Happy reading!