First and foremost, congratulations! Paying off debt is a BIG deal, and you should be proud of yourself. Now that you are officially debt-free, you’re likely ready to focus on building up and taking control of your credit score. If that seems like a daunting task, don’t worry! Increasing your score post-debt can be accomplished by following our four simple tips.
Tip #1: Pay Your Bills on Time (And Get Credit for It!)
Let’s say that you were going to hire someone to remodel your bathroom. You’ve narrowed it down to two contractors and called up the references they’ve provided to learn more about them. The first contractor receives glowing reviews—he was fast, efficient, punctual, and polite. The reviews for the second contractor, on the other hand, mentioned that he showed up late to jobs, overcharged, took longer than originally anticipated, and was rude to customers. Who would you hire?
Anyone would go with the first contractor because of his past performance, right? Well, like the service reviews for the contractors in our example, your credit score reflects your past financial performance, and lenders consider it a good predictor of how you’ll act in the future. You can positively impact your score by paying all bills—including loans, credit card bills, and rent—on time. Additionally, products like Experian Boost allow you to get a boost in score just by paying your phone bill and utility bills on time. Take advantage of this easy means of score improvement by setting up automatic payments. Doing this will ensure that you pay on time, every time.
Tip #2: Hold Off on Applying for Too Much New Credit
Each time you apply for a new line of credit, something known as a hard inquiry takes place. You can read more about the details of hard inquiries here, but the important thing to know is that too many hard inquiries at once can negatively affect your score. This type of inquiry can remain on your credit report for up to two years. Though this isn’t terrible in the long run, if you’re working to build up your score quickly, you’ll want to be strategic about when you apply for new lines of credit.
Tip #3: Don’t Close Unused Credit Cards
This one may seem confusing, especially if you just paid a credit card off. But resisting the temptation to close all your older, unused credit accounts can actually benefit you in the long run. We’ll talk more about this in tip #4, but closing an account may increase what’s known as your credit utilization ratio. Owing the same amount of money across a smaller number of accounts can result in a lower credit score, as how you use the credit available to you accounts for 30% of your credit score.
Similarly, your credit history also plays an important role in determining your credit score. The older your accounts, the more credit history you have. Unless you’re racking up annual fees on your older accounts, hold off on shutting them down.
Tip #4: Aim for the Sweet Spot of Credit Utilization
So what is credit utilization? Simply put, it’s the portion or percentage of your credit limit that you’re currently using. It’s the second most important factor in determining your credit score. The sweet spot is to keep your credit utilization ratio at 30% or less of your overall credit limit. Once you’ve gotten to 30%, pay your debts and balances in full each month in order to get closer to 10%, which is what most experts consider the magic number for increasing your credit score.
An additional way to improve your credit utilization ratio is to ask for a credit limit increase. As long as you don’t increase your balance, raising your credit limit positively impacts your credit utilization and therefore your credit score.
How Long Will It Take to See a Difference in My Score?
Once you’ve paid off your debt and put these positive financial behaviors into practice, expect that it will take some time to reflect on your credit score. Typically, any large changes in your score should show up in one to two months, while more habitual tasks like paying your bills on time will be reflected gradually. Be patient and keep up the good work; your score will show the results of your efforts before you know it!
If you’ve managed to pay off one debt but are still struggling with others, ACCS may be able to help. Request a Custom Debt Relief Plan with one of our debt specialists. Together, you’ll review your financial situation and find the solution that will help you achieve financial freedom.