Your credit score is important. It can determine whether you land your dream apartment, what cell phone plan you are eligible for and the interest rates you’ll pay on loans.
That’s because your credit score is considered a measurement of how likely you are to pay back the money you borrow from a lender. The better your score, the less risky it is to give you money. The worse your score, the less likely it appears that you will pay it back on time.
“Credit scores can predict with great accuracy the likelihood that a person will default on a loan,” Rod Griffin, senior director of consumer education and advocacy at Experian, tells CNBC Make It. “It gives [lenders] a numeric representation of the risk associated with lending to you.”
The average American has a credit score of 711, according to ValuePenguin, which qualifies as “good” under the FICO credit score breakdown. But if you’re looking at your score and see room for improvement, here are three things you can do to start building back up your credit.
1. Pay your balance on time, every time
There’s no quicker way to hurt your credit score than missing payments, which is why you should always make sure to pay your bill on time. Setting up autopay can be immensely helpful when you get a new credit card; it helps you demonstrate that you are a reliable borrower.
If you have a history of late payments, it will take more than one on-time payment to help rehabilitate your credit score. “Your score looks at behavior over time, not just what you did today,” Griffin says. Make a habit of paying your bill on time and don’t let yourself miss a payment.
While it’s ideal to pay your balance in full if you’re able, so that you can avoid accruing interest, paying the minimum will still show up as a completed payment on your credit report. It’s better than missing a payment altogether.
And if you normally pay your bill on time but for some reason are a few days late on a payment, it’s worth reaching out to your credit card issuer in advance to let them know and to ask if they could not report it to the credit bureaus.
2. Keep your balance low
In addition to making sure you always pay your credit card bills on time, keep an eye on how large your statement gets. In the eyes of lenders, using a high percentage of your line of credit — a figure known as a credit utilization rate — could be a sign that you’re a risky borrower.
Generally, experts recommend having a credit utilization rate below 30%. That means that if you have three credit cards with combined lines of credit worth $10,000, you don’t want to put more than $3,000 total on them each month.
“Lenders get nervous if your balance takes up too much of your available credit because the closer you get to maxing out, the more likely it may be a sign of financial difficulty for you,” Matt Schulz, a credit card expert at LendingTree, tells CNBC Make It.
If a borrower with a high credit card balance runs into an unexpected life event, like a job loss or medical issue, it will be more difficult for them to repay the balance.
If you get a raise and start making more money, you should tell your card issuer because they may increase your line of credit, Schulz says, particularly if you reliably pay your statement on time. Having a higher line of credit will let you increase your spending without hurting your credit score.
3. Review your credit report for any mistakes
Your credit score is based on the information in your credit report. Schulz recommends reviewing your reports from all three major bureaus at least twice a year — once in the summer and once in the winter — to make sure there aren’t any errors that are dragging down your score.
“People would be really surprised to know how many mistakes are on their credit report,” he says, recommending that consumers keep an eye out for payments that may have been mistakenly marked as late.
These mistakes “can have a significant impact on your credit score,” Schulz says, and fixing them can result in a 50-point bump in some cases.
“These errors aren’t anything malicious, it’s just human error and it’s up to each individual to check their credit report every once in a while to make sure everything looks as it should,” Schulz says.
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