Improve Your Credit Score
You can improve your credit score in a variety of ways that are not difficult. A better credit score lowers your cost of borrowing, expands your opportuties for financing, reduces your car insurance rates and can eliminate many types of service security deposits. Taking steps to improve your credit score offers you many benefits that might not be so obvious to you.
Where do you start? Well, you need to know where you are. That is, the status of your credit score and then the steps you need to take to improve it. As you would expect, let’s start at the beginning.
Consumer Credit Score Basics
Your credit score is your credit history expressed as a number. It is a three-digit number, typically between 300 and 850, designed to represent your credit risk, or the likelihood you will pay your bills on time. You can also think of it as a grade for how responsibly you have managed loans, lines of credit and other financial obligations over the years.
Credit scores are calculated using information in your credit reports, including your payment history, the amount of debt you have, and the length of your credit history. Higher scores mean you have demonstrated responsible credit behavior in the past, which may make potential lenders and creditors more confident when evaluating a request for credit, like a loan or a credit card.
There are two parallel paths to improve your credit scores. First, ensure that the information used to calculate your credit scores is correct. Second, changes in your financial behavior and use of credit that will positively affect your credit scores. You need to do them both.
Are Your Credit Reports Accurate?
As mentioned, you need to start at the beginning. Get copies of your credit reports from the major credit bureaus. (They are free.) Review them to see if there are any obvious errors that need to be corrected.
Why? One American in five has errors in their credit reports based on a recent report from the FTC. These errors can negatively affect your credit scores since they are calculated solely based on the information in your consumer credit reports.
If so, you need to do credit repair, by submitting a dispute to the credit bureau that issued that report. If the information cannot be verified within 30 days, the credit bureau must remove the item you disputed.
You or a third-party credit repair company can do this. There’s nothing a credit repair company can legally do for you, even removing wrong information, that you can not do for yourself for little or no expense.
Changes In Your Financial Behavior
1 – Pay Your Bills On Time
Your payment history is the most important part of any credit score (35% Weight). The first thing any lender wants to know is whether you have paid past credit accounts on time.
This helps a lender figure out the amount of risk it will take on when extending credit. That is because your past payment performance is usually considered a good predictor of your future performance.
You need to pay ALL your bills on time. That means credit cards, personal, auto and student loans, rent, utilities, telephone bill, etc. If you are late on some payments, focus on getting them all current.
These late payments will adversely affect your credit score for up to seven years., but they will carry less weight over time. The soon you pay them off, the sooner they will roll-off your financial history.
It is pretty basic. Just pay your bills on time, all of them.
2 – Pay Off Your Debt…
Having credit accounts and owing money on them is the second most important category of a credit score (30% Weight). It is an indicator of whether your spending habits are sustainable and if you are likely to face serious financial problems in the future.
If you are using a lot of your available credit, this may indicate that you are overextended-and banks can interpret this to mean that you are at a higher risk of defaulting.
Total Amount Owed Across All Accounts – The sum of all your last credit account statements.
Amount Owed On Specific Account Types – This would be revolving or installment accounts, in addition to your overall amount owed.
And Keep Balances Low
Number Of Accounts With A Balance Due – Too many accounts with a balance could indicate a higher risk of over-extension.
Credit Utilization Ratio On Revolving Accounts – This indicates how much of your available credit you are using.. It is an important factor since if you are reaching your account limits, you might have trouble making payments in the future.
Remaining Amount Owed On Installment Loans – Consistently paying down installment loans indicates that you are able to manage and repay debt.
For strategies on how to pay down your credit cards (usually the largest component of consumer debt), check out this article.
3 – Increase Your Credit History
In general, a longer credit history will increase your credit report (Weight 15%). The length of time using loans, credit cards and lines of credit is important in accurately forcasting a borrower’s future risk behavior.
As you pay off your revolving credit accounts (loans and credit cards), you should NOT close them. Yes, you have every right to close them and rip them up as a form of celebration.
However, avoid the temptation and leverage them instead. Put them away. Don’t use them. That unused credit balance improves your credit-utilization ratio (above), which improves your credit score.
4 – Minimize New Credit Accounts
Your credit score takes into account several factors when considering your amount of new credit (Weight 10%). Opening several new credit accounts in a short period of time indicates greater credit risk.
The Number Of New Accounts – How many new accounts and what type.
Time Since You Last Opened A New Account
How Many Recent Requests For Credit – Credit requests will prompt inquiries, which remain on your credit report for two years.
Whether You Are Rate Shopping – Multiple loan applications that commonly involve rate shopping (mortgage, car loan or student loan), are counted as a single inquiry, if they all fall under a typical shopping period.
As you would expect, to improve your credit score takes time. According to Experian, time is your ally in improving your credit scores. There is no quick fix for bad credit scores. Rebuilding your credit and improving your credit scores takes time as there are no shortcuts.
An overview of steps to take to improve your credit score is presented. This includes 1) Credit Score Basics; 2) Accuracy Of Information For Your Credit Scores; and 3) Changes In Your Financial Behavior.
Have a comment or question? We welcome your feedback, so just jot it below. And, if you know someone that might benefit from this article, please send it along via your favorite social media channel.
For additional information on how to regain control of your financial situation and future, please Contact Us for a free, no obligation consultation.