Need to boost your credit score? Considering, the average Americans' credit score falls within the "fair" rate, chances are most of us can probably use at least some advice. Having an excellent score is especially important because it impacts things like getting approved for credit cards, loans, and receiving desirable interest rates. Apply the five ways below and you'll be able to move your score into the excellent category.
Before jumping into how to improve your credit score, let’s take a second to understand how it works. First, a credit score is really just a numerical expression of a person’s creditworthiness, and the higher the better when it comes to this metric. To determine a person's individual creditworthiness, creditors use your score as a means to predict if you’d be a reliable investment. Then based on your score they can determine who qualifies for a loan, what interest rates to give, and what credit limits to set. Equifax, Experian, and TransUnion are the three main credit bureaus. They collect your consumer information and then resell the information to creditors in the form of a credit report. The most widely used credit score is the FICO score and when creditors use this they are looking at five key factors: payment history, accounts owed, length of credit history, types of credit used, and new credit available.
Now that we have the basics covered, let’s walk through some ways to make sure your credit score is the best it can be.
Making payments on time is one of the biggest contributing factors to your credit scores, with your payment history accounting for 35% of your total score. That's why anyone's first step to improving credit is the most obvious: set up a plan to pay your bills on time. Missing even one expense by a day can negatively impact your credit score, and delaying 60 or 90 days can pull your score down significantly. When creditors look at your score and see a missed installment it's like throwing up a red flag. They'll see the missed installment(s) and assume you could be a risk and in return deny your credit or increase your interest rates. If you've only missed one payment it doesn't hurt to reach out to your billing companies about removing the missed date from your record. If you have a long-existing track record of making installments on time, they are usually forgiving. However, if you've missed multiple payments that most likely won't be an option. Instead, your best bet would be to begin setting up reminders or enrolling in an automatic payment plan. It's especially important to get your expenses under control because missed or late payments can stay on your report for seven years.
In order to better your credit score you'll want to know how much improvement is needed, and so if you've never viewed your credit report, request a free copy and start scanning it for errors. Everyone is entitled to receive a copy of their report once annually from each of the three bureaus. Your credit report contains all of the information used to calculate your score. Credit bureaus are not perfect so they can and do make mistakes. Among the possible mistakes, the most common errors you may find are identity, incorrect account details, and fraudulent account errors. An identity error can range from having the wrong phone number to a more troublesome issue of mixing up your score with someone else's. Although these mistakes won't necessarily bring your score down they are still affecting how you perceive your score. The second error that will affect your score is having incorrect account details. For instance, if closed accounts are reported as open or have the incorrect credit limit listed, you will need to get those removed from your report. The last mistake and also the most serious is someone trying to steal your identity and opening lines of credit with your information. When and if you identify an error you should dispute it immediately with the credit bureau that is reporting your score incorrectly. In order to dispute the error, you'll need a copy of the credit report containing the error and supporting documentation for your case. Then you need to inform the appropriate credit bureau of the issue that needs to be corrected. If you feel there is a discrepancy taking the necessary steps to get it corrected can make a huge difference in your score.
How old is your credit line? Some people get a credit card as soon as they can and others wait until they need it, but the truth is the age of your credit has a huge impact on your score. Creditors will want to see you have sources of credit open and are making payments. The longer the account is open and in good condition, the better it is for your score. In the same way, employers are looking for outstanding qualifications on a resume, creditors want to see you have good credit experience. One big misconception about debt is that closing out old credit lines will help your score, but it can actually have the opposite effect. This is because 15% of your credit score is based on the length of your credit and it’s tempting when you’re struggling to balance debt to just get rid of the source. However, if you can manage to keep old accounts open and functioning that will allow your payment history to grow and in turn, improve your credit score. If your past debt mistakes are severely bringing your score down, then you may consider closing it. Be aware, though those mistakes will still carry on your score for at least seven years. The longer your history of good debt is, the better it is for your score, so try to leave old good debt on as long as possible.
What's your credit utilization ratio? If you're unsure, this might be the answer to why your score is low. Your credit utilization ratio is simply the number of outstanding balances on all your credit cards divided by the sum of each card's limit, and it's expressed in a percentage. The lower the percentage the better your score will be. So let's say you have three credit cards:
Card 1: Credit line $2,000, balance owed $500
Card 2: Credit line $8,000, balance owed $2,000
Card 3: Credit line $10,000, balance owed $4,000
To determine your ratio you'd add the balances owed: $500, $2,000, $4,000= $6,500 and divide that by the credit lines: $2,000+$8,000+$10,000= $20,000, making your credit utilization ratio, 32.5%.
Creditors prefer to see a utilization ratio of 30% or less, but there is no magic percentage when it comes to the ratio. Bringing down your ratio can have a big impact on bettering your credit score. If you discover your ratio is over 30% there are ways to lower it. For starters, you try to pay off your balances in full every month or increase your credit limits.
The final way to improve your score is much easier said than done, stop overspending. If you can reduce your spending amount, it'll reduce the amount of debt to repay and make bringing your score down simpler. Using your credit cards responsibly and staying financially informed is the best action you can make for improving your overall credit score. Building up debt is more than overspending; for example, did you know if you agree to cosign for someone and they default on that loan it will come back to you and that decision will then affect your credit score? If you don't already have a spending plan, here's one that can get you started. Another resource for reducing your debt and enhancing your credit score is Credit.org. They offer credit and debt counseling services at no cost to you. As long as you can properly handle debt, using credit cards isn't always a bad thing and when used appropriately and balances are paid on time your credit can improve your score.
While refining your credit, remember there are no quick fixes, and to fully see a difference, it will take time. Commit and stay consistent by making payments on time, correcting report errors, keeping old debts open, decreasing your credit utilization ratio, and avoiding excess debt build-up. Implement these and you'll be on your way to excellent credit.