Many people think that a credit score is just some arbitrary number, but it's so much more than that. A credit score can dictate what interest rate you get on your car loan, mortgage, or credit card. It also dictates how much money you're going to have to pay for things like insurance and loans. Understanding the importance of having a good credit score is crucial if you want to survive today's economy. It may take time but understanding your credit score is the most important thing a person can learn. This is a step-by-step guide on improving your credit score.
Review Your Credit Reports
To improve your credit, it helps to know where you're starting out at. Learning what might be working in your favor or against you is a good way of coming up with a plan.
That’s where reviewing each of the three major national credit bureaus comes in. Pull a copy of your report from Equifax, Experian, and TransUnion. You can get your free credit report at AnnualCreditReport.com.
Once you've reviewed your credit score from each bureau check to see what is helping or hurting your score. Understanding why you have a low credit score is important because it can help you to find problems and come up with solutions for those problems.
Aim for 30% Credit Utilization or Less
Credit Utilization refers to the amount of credit you are using in a given time.
Avoiding high credit utilization is important because credit utilization makes up nearly 30% of your overall score. One way to decrease utilization is by lowering the amount of debt you have. It sounds simple, but avoiding high utilization can drastically help your credit score. Once your utilization passes the 30% mark it can start to affect your credit score drastically.
Another tip is to ask your credit lender for a credit limit increase. You'll be able to request a higher limit from most card companies online or by phone. The one thing you need to do is update your household income before applying for a credit increase. After that, it shouldn't take that long to figure out if you have been approved or not.
Pay Monthly Bills on Time
More than 90% of lenders use the FICO credit score when determining if there going to give you either a loan or a credit limit. Your FICO credit score is made up of five distinct factors:
Payment history (35%)
Credit usage (30%)
Age of credit account (15%)
Credit mix (10%)
New credit inquiries (10%)
From the list above, a person can see that payment history has the biggest impact on your credit score. Meaning that one late payment can drastically decrease your credit score. Paying off debt and avoiding any late payments is one of the most important things you can do when trying to increase your credit score.
Three most important tips when trying to avoid late payments:
Set up automatic billing on every credit card you use. Doing this can help prevent missing a monthly payment.
Set due-dates alerts, so you know the upcoming bills that are due.
Try using one credit card for everything. Doing this can help keep things simple and organize and prevent you from forgetting to pay a monthly bill.
Avoid "Hard" Inquiries
There are two types of inquiries that can appear in your credit history. You can either have a "hard" or a "soft" inquiry.
Typically, a soft inquiry won't affect your credit score because it only includes checking your own credit. This is done by many financial institutions like your banks and even credit card companies. Many companies that send you letters that say "You Have Been Pre-Approved" more than likely checked your credit score beforehand.
In contrast, hard inquiries can drastically affect your credit score. This is the credit check that occurs when you apply for new credit cards and loans. Hard inquiries can stay on your credit report for months and even years.
If you are applying for a loan or opening a new line of credit with different banks it's important to spread these out so they don't all happen at the same time. Having too many hard inquiries on your credit report can damage your credit score. If you've already applied to several places in recent months and have been declined by various institutions, then wait until this inquiry has "fallen off" before trying again.
The Bottom Line: You can avoid hard inquiries by not applying for too many different credit cards in a short amount of time.
Improving Your Credit File
Having a thin credit file is like being a blank canvas. Meaning that creditors don't really know how likely you are to pay off your debts with them. An estimated 62 million Americans don't have enough history with creditors for their score. Fortunately, there are creative ways in building a credit history.
The Experian Boost program is the newest thing in town, and it's designed to collect financial data that is not currently measured by other programs. This program collects banking history and utility payments and includes them in your Experian FICO credit score. This is very beneficial for someone who has very little credit history because it helps to establish some sort of payment history in your credit report.
Ultra Fico is another program that is similar to the Experian Boost. This program uses your banking history and converts it into a FICO score. A good way to keep that number at the top is by having a savings cushion, maintaining an account over time, paying bills through your bank account on time without overdrafts or late payments.
These two programs are designed to help Americans who have little to no credit history. Implementing these programs can help you have a better chance of getting approved for a credit card or in some cases even a loan.
Keep Old Accounts Open
The age of your credit accounts matters a great deal to lenders. The older the average account, the more favorably you appear when it comes time for them to approve or deny lending requests.
If you have old cards sitting around that are no longer being used, don’t close those down! Closing an unused card while carrying high balances on other cards would lower available credit—which is bad for your score since having too much debt can knock some points off over time. Maintaining a long credit history is important because the age of credit account makes up 15 percent of your credit score. Meaning that you should always prevent closing old accounts.
Dealing With Delinquencies
If you have delinquent accounts, charge-offs, or collection accounts don't let them go ignored. Take action to resolve the situation and work out a plan for future payments on time. This may not help your credit score in the short term, but it can help your credit score in the long term when trying to rebuild your credit.
Paying off your debts may seem like the best course of action, but it depends on your situation. When debts that you owe goes to collections, that report will remain on your credit history for years to come. At some point, delinquent accounts will be taken off your credit report, but that could take up to 7 years. Depending on your financial circumstances, it makes sense to weigh out all options before making any decisions. You're better off settling or even consolidating your debts.
Consolidating Your Debt
Debt consolidation is a great way to consolidate your debt and save yourself some money, time, headaches! Taking out one loan instead of several will be easier on you so, in the end, it can lead to better credit scores. Also, doing this can help you save money if you lock in a loan with a low-interest rate. Having one payment to make rather than several will help you be less stressed out while allowing you to pay off your debt faster.
Another similar tactic is the balance transfer method. Paying off your credit card balance by transferring to another credit card is a good way to save money. Transferring balances to cards that have a promotional APR like 0% for the first year or even a lower APR rate can help to pay off your debt sooner. However, you should be aware that there is a transfer fee that can range between 3 to 5 percent of the amount you transfer. Always way your options before going through a plan.
Monitor Your Credit
With free credit monitoring services, you can see how your score changes over time. You'll usually get access to at least one of the three major credit-reporting agencies' scores each month that are updated monthly. You can check your credit score with either Equifax, Experian, or TransUnion. These agencies monitor your accounts and report any changes that happen to your account each month.
Other than that, many of these credit monitoring services offer identity theft and fraud protection. When a new account is opened you get notified right away which is important because flagging unauthorized accounts can help to prevent fraud in the future. Taking control of your credit history is important and is something everyone should do.
Conclusion
Your credit score affects your ability to get loans, which can have a major impact on the type of interest rates you qualify for. Knowing how to improve or maintain an excellent credit score will help you avoid many financial obstacles in the future.
In this blog post, we’ve covered some tips that should make it easier for you to understand what makes up your credit report and ultimately increase your credit score. Remember the sooner you start, the sooner you will see results.