Good credit frequently makes it smooth to qualify for loans, credit cards, and more at affordable interest rates. Even if you don’t have immediate plans to apply for financing, good credit can save you money in other ways, such as lower insurance premiums.
Here is a breakdown of how credit scores work along with some tips you can use to try to boost those important numbers.
How Is Your Credit Score Determined?
Regardless of the brand, a credit scoring model is essentially a complex software program. It evaluates the details of your credit report and assesses the risk that you will be paying into an account 90 days or more late in the next 24 months.
- A scoring model can take the following and more into account when calculating your credit score:
- Whether you paid bills late and, if so, how long and how late you paid them.
- The relationship between your credit card limits and compensates for your credit usage.
- How long has it been since you opened your first credit account and your average age?
- Your understanding with a mixture of account types, e.g. rotating, on installments, etc.
- How many times have you applied for a loan in the last 12 months?
If your credit report has a long history of punctuality, low credit utilization, and experience in managing a variety of account types, such as credit cards, loans, etc., your score is likely to be in good shape. You have handled your accounts well in the past, so you are likely to continue to do so in the future.
6 Ways To Improve Your Credit Score
Ready to reap the benefits of an excellent credit score? FICO scores range from 300 to 850, with lenders classifying scores between 800 and 850 as “exceptional.”
Here are six tips that can help you improve your credit score.
1. Check Your Credit Reports
You may be surprised to learn that you don’t just have one credit score. You don’t just have three credit scores – one from each credit bureau. Instead, hundreds and perhaps even thousands of credit scores are commercially available.
You cannot control what credit score a lender uses to evaluate your credit report. However, you can exercise some control over the credit reports on which your credit score is based. There are many credit scores, but you only have three credit reports.
However, if you discover an error in credit reporting, you can challenge the error under federal law with the credit reporting agency responsible. If you contest a false negative account and a credit reporting agency removes it from your report, it could improve your credit rating.
2. Stay On The Payments
Paying your bills on time is one way to show lenders that you are responsible for credit.
“You want to avoid things like defaults, foreclosures, repossessions, late payments, and 3rd party debt collection”. “And bankruptcy filing is a terrible idea. Anything that would indicate non-compliance will damage your credit score.”
Late payments – even occasional ones – can have a profound negative impact on your credit score. If you need help to break the late payment habit, automatic payments and an emergency fund could both work in your favor.
3. Lower Your Credit Utilization
After your payment history, your debt relative to your available credit is the next most important factor in your credit score. FICO is based on 30 percent of your credit score on the “Amounts Owed” category of your credit reports.
Your credit usage ratio – the ratio of your credit card balance to your limits – has a big impact here. If you pay off your credit card balance and as a result lower your usage rate, your credit score can improve.
So what is the perfect credit utilization rate? It can vary depending on the point system a lender uses. As a rule of thumb, you should pay off your credit card balance in full each month. It is also helpful to ask your credit card issuer for a higher credit limit.
The date on which your credit card issuer reports your information to credit bureaus also important. Your credit card reports do not show your credit card balance and utilization in real-time. Instead, the information changes only once a month – shortly after the closing date on your account. Whatever your credit card balance is on that date will appear on your credit card report for the next month.
If you are struggling with high balances and rising interest payments on your cards, you should consider consolidating your debt with an introductory 0 percent credit card. A low-interest personal loan could also be worthwhile.
4. Ask A Friend Or Relative For Help
Your credit history plays a very important role in your credit score. FICO bases 15% of your credit score on elements such as the age of your oldest account and your average age of all accounts. Older is better.
In many cases, you simply have to sit back and wait for your credit scores to improve within this category. However, if you have a loved one with a well-managed credit card account, you may be able to ask for a helping hand.
If a friend or relative adds you as an authorized user to an existing credit card, this can help extend your credit history. Provided the account is in good condition, such as on-time payments and low credit utilization, it can improve your score when the account appears in your report.
It may be tempting, but be careful not to piggyback on a stranger’s credit card. Even if there are companies that assist you in “rent” the authorized user status on another valid person’s credit card for a fee, this activity can be considered a scam if you apply for financing afterward.
5. Taking Advantage of Self-Reporting
The number and the average age of accounts on your credit report can help lenders determine how well you have handled debt in the past, so those with a limited credit history may find themselves at a disadvantage. Besides becoming an authorized user on a loved one’s credit card or also, you can add information to your credit report by self-reporting.
Experian Boost and UltraFICO are two free programs that allow consumers to expand a thin credit profile with other financial information.
After you choose Experian Boost, you can connect your online banking data and give the credit reporting agency permission to add the history of telecom and utility payments to your report. UltraFICO Score allows you to give permission for your bank data, such as checking and savings accounts, to be included in the calculation of your Experian-based UltraFICO score alongside your report.
Apart from these two free programs, some paid services also allow you to add certain types of information to your credit reports, such as:
- eCredable Lift
You may only want to report accounts with a positive payment history to credit bureaus. While Experian Boost only adds positive accounts to your Experian report, this does not apply to all self-reports.
6. Don’t Apply For New Accounts Too Often
When you apply for a new credit line, a hard request is added to your credit report. This type of request has the potential to temporarily lower your score. A hard credit request remains on your credit report for 24 months and can affect your credit score for the first 12 months.
Before applying for a new credit card, you should check your probability of approval to ensure that you are a good candidate. You do not want to risk losing your score for a rejected application. You should also refrain from applying for multiple credit cards within a short period of time or before taking out a large loan such as a mortgage.
Remember that checking your own credit report is considered a soft request and will not harm your score. Hard requests and soft requests are not the same when it comes to credit scoring.
You don’t earn a perfect score of 850 credit score overnight. Nevertheless, every step in the right direction could bring benefits. If you move from bad credit to fair credit to good credit, you can start saving money and seizing more opportunities.
The best way to achieve and maintain an excellent score is to develop good long-term credit habits. Pay your balances on time, maintain a low utilization rate, and apply for credit only when you need it. If you follow these rules of thumb, your score should improve over time.