How to improve your credit score?
The last two years have brought major economic changes such as inflated prices and interest rate hikes putting pressure on many households and making budgets tighter. The cost of borrowing went up as well which means higher interest rates on credit cards, mortgages, auto, and personal loans. However, you can lower the cost of borrowing by taking steps to improve your credit score. Creditworthiness enhancement takes some discipline, patience, and time, but it will pay off in the end. You will have access to better loan terms and interest rates and will save you thousands of dollars. So, if you are trying to improve your credit score, you can follow some simple and effective steps, such as opening new accounts; paying your bills and rent on time; maintaining low balances on your credit cards; limiting hard inquires; and other steps. Some of the strategies will take a few weeks or months to work, but some steps are doable in a single day and will increase your credit score instantly. Whether you are building your credit from scratch or trying to improve your credit score after it has taken a hit, it is important to understand how your scores are calculated and basic ways to improve them.
How Is Your Credit Score Calculated?
Your credit score is usually determined by computer algorithms or so-called scoring models that analyze your credit reports from credit bureaus such as Equifax, Experian, and TransUnion. Different factors or the same factors weighted differently can be used in those models. Scores are always determined based on the information in your credit report and are calculated by FICO scoring model. Factors that contribute to a higher credit score include on-time bill payments, low or no balance on your credit cards, and minimal hard inquiries. Factors such as collections, missed payments, and high credit card balances will lower your credit score. Credit scores have a range between 300 and 850. If your score is between 800 and 850, it is considered excellent. You are viewed as a low-risk borrower and will be able to secure a loan with low interest rates. If your score is between 740 and 799, it is considered very good. You demonstrate decent creditworthiness and will have an easier time being approved for a loan. A score between 670 and 739 is viewed as good and you will be considered a low-risk borrower. A score between 580 to 669 is fair, and lenders might determine that you are a high-risk borrower; therefore, you may have difficulty qualifying for new credit. A score between 300 and 579 is considered poor. You will certainly have challenges being approved for a loan. The scoring models can also predict your financial responsibility when it comes to paying bills. For example, if you have a poor credit score, it will be determined that you are likely to fall behind on a bill, and vice versa. The bottom line is if your score is below excellent, you definitely want to invest in credit history improvement.
How do you improve your credit score?
You can take specific actions to achieve FICO score boost depending on your unique credit situation. There are some general steps that will increase anyone’s credit score. The main goal is to demonstrate that you are capable of managing credit responsibly.
Build Your Credit File
Opening new accounts is the first step in building your credit file and improving your credit score. You cannot build a good credit history if there are no accounts in your name. Major lenders and card issuers report new accounts to all three credit bureaus. Having at least several open and active credit accounts is crucial in building your credit file. If you do not have any credit history or have bad credit, a good starting point is authorized user accounts which means getting added as an authorized user on someone else's credit cards.
Don't Miss Payments
Your payment history plays an important role in determining your credit scores. Having a long history of on-time payments can help you boost your credit score. Payments that are 30 or more days late can be reported to credit bureaus, so make sure you do not miss any payment by more than 29 days. In order to avoid missing payments, you can set up automatic payments for the minimum amount due. A long flawless payment history is the fastest way to improving your credit score.
Catch Up On Past-Due Accounts
Being behind on your bills is not going to help you increase credit score. A late payment can remain on your credit report for years, but paying your past due accounts as soon as you are able to and bring them current will help. Moreover, late payments will stop being added to your history and you will avoid additional late fees. If you are in too much debt and cannot catch up on payments, it is time to turn to a professional credit counselor for some debt consolidation tips. A counselor can set up a debt management plan and negotiate lower payments and interest rates.
Pay Down Revolving Account Balances
Revolving accounts include credit cards and lines of credit. Even if you pay your credit card bill on time, having a high balance can result in a high credit utilization ratio which is calculated by dividing the amount of revolving credit you are currently using by the total amount of revolving credit you have available. High credit utilization ratio can hurt your scores; therefore, you should try to keep the balance on your credit card low relative to the credit limit if improving credit score is your goal. Try to keep your credit utilization rate below 30%, which means that if you have a credit card with a $10,000 limit, the balance on it at all times should be less than $3,000.
Limit How Often You Apply for New Accounts
As discussed earlier opening new accounts will build your credit file and will improve your credit score, but you generally need to limit your new credit card applications. When you apply for new credit, the creditor pulls your credit file resulting in hard inquiry which stays on your credit report for two years. Those inquiries can add up and have a negative compounding effect on your credit scores. New accounts will also decrease the average length of your existing accounts, and that also can affect your scores. Those factors could have a minor implication, but it is still a good idea to get hang of a credit inquiries management and limit the amount of new applications. The only exception is when you are applying for auto loans and mortgage and are comparing rates. If this happened within a couple of weeks, the credit scoring models do not consider such activity as risky.
Following these simple steps will demonstrate your financial responsibility and improve your credit score.
How to Boost Your Credit Score By Paying Rent?
Paying your rent regularly and on time can contribute to improving your credit score. You have to sign up for a rent reporting service that reports your good payment history to credit bureaus. You have to pay your rent directly through the service and pay a monthly fee. The rent-reporting service will then transfer your rent to your landlord. Before you search for a rent reporting service, talk to your landlord- he or she may already be enrolled in such service, and you can save on the fees. When you look for a rent reporting service, make sure that they report to all three credit bureaus. Also, confirm with your landlord that he or she is set up to receive the payments through the service. Wait at least 30 days after your first month of rent is reported through your rent-reporting service and request a credit report from Experian, Transunion, and Equifax to confirm that your payment was noted.
How Long Does It Take to See Changes in Your Credit Score?
It is difficult to predict how long it takes to improve your credit score. It solely depends on the steps you are taking and what is hurting your credit in the first place. If you only missed one payment, it would not take too long to rebuild your history as long as you continue to make payments on time. On the other hand, if you missed multiple payments, it would take much longer to recover. If you have destroyed your creditworthiness through foreclosure or bankruptcy, it can take years to make your way back to a good credit score. Credit monitoring services can help you stay on top of your credit history as they give you frequent access to your credit history, so you can check your credit report as often as you like. Such devices can alert you if there are any major changes to any of your accounts such as late payment, credit card balance increase or new accounts being opened in your name. This helps you stay on track with improving your credit score.
Why does a good credit score matter?
Many of us only think that a good credit score will help to borrow money via credit cards and loans. However, a good credit score can offer many more additional benefits. If you have a high credit score, you might have access to the lowest interest rates available on mortgages and auto loans. When you make a big purchase such as a house or a car, a low interest rate can mean saving thousands of dollars in interest charges over the life of the loan. A good credit score will help you get better loans and credit cards with better rewards. You can also get a better car insurance since many companies use credit-based insurance scores to help determine whether they want to cover you and what premium they will charge. Moreover, a great credit grants you more housing options as many landlords and property management companies check tenants’ credit score to make a decision on tenant’s reliability and financial responsibility. Having a good credit will also help you avoid any deposits with utilities companies such as internet providers, cable companies, and satellite dish companies that review your credit reports before accepting you as a customer. The bottom line is improving your credit score is crucial, especially if you plan on making a major purchase such as a house or a car. It will help you save thousands on interest rates and getting approved for a loan in the first place. It takes a lot of time and effort to improve your credit score, but the results will definitely pay off. Having an excellent credit score opens doors to many opportunities, helps minimize stress and pressure, and makes life easier and much more enjoyable.
