Looking for a few tips to increase your credit score? Here are some of the best things you can do.
Tip #1 to Boost Credit Score: Improve Your DTI
Have you heard of your debt-to-income (DTI) ratio? It’s basically a ratio that helps lenders determine if it’s risky to give you a mortgage.
Your debt-to-income ratio is calculated by dividing your debt by your gross monthly income. For example, let’s pretend your monthly debts include a $1,500 mortgage, $400 in student loans and a $300 car loan. Add them together and you pay $2,200 in recurring debt each month.
If your income is $72,000 per year, you make $6,000 per month in gross income. Your DTI then is $2,200/$6,000 = 0.3667, or 36.67%. Not bad, but lenders often like to see something a little better.
To improve your DTI, you have two options. You can either increase your gross income or decrease your debt. Ideally you can do both, but let’s pretend you just go with 1 path right now.
If you pay off your student loans, now you only owe $1,800 each month. $1,800/$6,000 = 0.30, or 30%. That’s generally low enough to get you a great deal on a mortgage!
Tip #2: Improve Your Credit Utilization Ratio
Your credit utilization ratio is another thing that shows lenders how well you manage your money. To calculate it, divide your credit balance by your credit maximum.
For example, let’s say the limit on your credit card is $10,000 and you have a balance of $5,000. That means you’re at 50%, which is a bit high.
To lower it, you can technically open a new line of credit, but it’s better to pay down your existing credit. So for example if you paid your balance down to just $2,000, that brings your utilization ratio to 20%, which is under the 30% that’s generally recommended by experts.
Credit Score Tip #3: Pay Your Bills on Time
The main factor that determines your credit score is how well you pay your bills. Do you always pay on time? When you do pay, is it always the full amount?
Or do you end up missing payments or shortchanging your creditor?
No, it’s not always easy to pay on time. Life happens:
- Something breaks around the house and it costs a ton of money to fix it
- You lost your job
- A medical expense pops up
Things happen. But do what you can do to make sure the bills get paid on time and your credit score will thank you for it.
Tip #4: Don’t Close Credit Cards
It’s tempting to close a card when you’re done using it… but you shouldn’t. Creditors don’t just look at the balances of your cards, but also how long you’ve had them.
A longstanding line of credit is a good sign, as it means you’ve been able to maintain a good relationship with that credit card company for a long time.
In other words, it means you pay your bills – always a good sign to lenders.
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