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Credit scores are an important part of daily life. They determine whether you can get a loan, what interest rate the lender will charge you, and how much your insurance premiums will be. Unfortunately, the average American’s credit score is 685, which is considered “fair” by the three major credit bureaus and means many Americans aren’t reaping the benefits of a good credit score.
If you want to optimize your credit score in 2022, here are five steps that could help.
1. Consolidate your debt now before interest rates rise
The Federal Reserve has announced plans to raise interest rates this year, and most lenders will follow their lead shortly after. Rather than dealing with sky-high interest rates, start looking into debt consolidation. You can use this debt consolidation loan calculator to find out just how much you’ll save in interest by moving your credit card debt over to a consolidation loan. Do it now to lock in pandemic-level interest rates as there’s no definitive timeline for when rates will rise. You’ll also reduce your credit utilization by moving your debt over to a consolidation loan and can expect to see an increase in your credit score shortly after.
2. Ask your creditors for a credit limit increase
Your Credit Utilization ratio is the second most significant factor that affects your credit score (the number of on-time payments you’ve made is the first). One way to improve your ratio is by requesting credit limit increases for your credit cards. Start with lenders who have the longest-standing relationship with you, but only if you’re not too close to your credit limit on those accounts. Lenders are typically more willing to approve limit increases for accounts that are in good standing and not already maxed out.
3. Pay down your outstanding credit card balances
The easiest way to improve your Credit Utilization ratio, and thus improve your credit score, is by paying down your debt. Not only will this improve your ratio, but you’ll have the added benefit of paying less interest over time, and paying interest only increases the costs of the things you’ve already bought.
4. Keep that old credit card open and close newer ones
If you’re looking to reduce the number of credit cards you have, close your newer accounts instead of your oldest cards. The average age of your credit history is a significant factor for your credit score, so it’s in your best interest to keep your oldest accounts open as long as possible. Keep in mind that whenever you close an account, though, even if it’s a new one, you will reduce your amount of available credit, and thus increase your credit utilization ratio, which could impact your score negatively.
5. Review your credit report and dispute any errors
If your goal this year is to take an active role in improving your financial health, then you need to establish a habit of reviewing your credit report regularly. You can use any number of credit monitoring apps that perform soft pulls on your credit that don’t show up on your report or drag your score down. Check your report regularly and look for any errors in the number of accounts you have, your credit limits, late payments, and hard pulls. If you do find something wrong, filing a dispute with either the creditor or the credit reporting bureau is easy, and you can expect results in a few weeks.
Keeping up to date with your credit report not only helps you stay active with checking your score but can prevent identity theft and fraud from causing a significant disaster to your finances.
The bottom line
To optimize your credit score, you should pay your credit card bills on time, manage your credit utilization, pay down your balances and maintain a long credit history. By following these tips, you can improve your credit score in 2022 and avoid the many pitfalls that can negatively impact it.