Are you struggling to get a credit card? Disappointed with what lenders are offering you? Maybe it’s the right time to take a good look at your credit score.
Your credit score is what determines if you are going to get that loan or credit card. It also helps determine the credit terms. That’s because it is a number that tells a lender how much of a credit risk you are. The higher the number, the better rates you will get, and the easier it will be to get approved. The lower your credit score is, the higher the interest rates will be, and you’ll have more expensive loan terms. In other words, a good credit score makes life easier. Plus, you have a better chance of qualifying for credit cards and loans, getting better insurance rates, and more.
So, the first step is to know your credit score, to know where it stands, and why. There are ways to improve it, and although this doesn’t happen quickly, it is worth the effort. If you are planning on getting a new credit card or loan, it’s a good idea to start early and get your credit score on track.
In this article, we will discuss in detail some tips, tools, and strategies to improve your credit score. But before we dive deep into this, we will look at the basics. Surprisingly, some people stumble very early on in this process because they do not understand the basics very well.
What is a Credit Score?
A credit score is a three-digit number that summarizes your credit history. It is a very commonly used method to predict risks related to repayment of the loan. The credit score tells the lender what risk they take by giving you credit.
The credit score is the primary thing lenders look at when somebody applies for a new credit card or a loan. However, in addition to this, there is the debt-to-income ratio. Together, these help determine if the client can afford to take another monthly payment. Generally, a ratio of 35-40% or less is good.
There are many different credit scores and models to calculate the credit score. These models are used by financial institutions to determine how creditworthy a potential customer is.
The most popular one in the U.S is the FICO (Fair Isaac Corporation). Within the FICO, you have many different types of credit scores based on various criteria. There are different versions of credit scores which can be custom made for a given lender or group of lenders. Other popular scores include Experian PLUS, VantageScore, and Equifax, among others.
Generally, the credit score number helps lenders to calculate their risks and what interest rates to offer to cover this risk. There are many types of scores, but you don’t need to worry about all of them. Rather, it is more important to understand the idea behind them and to be able to determine where you stand.
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How is my Score Calculated?
There are different algorithms for calculating the credit score. These algorithms may vary to some extent, but they generally consider the following factors:
- Payment history – Are you covering your payments on time?
- Debt Usage – What is the amount of debt you have vs. the credit available?
- Credit accounts – How many credit accounts do you have, and what are the credit card balances?
- Credit history – How long you have had credit, and how are you using it?
- The number of credit inquiries – How many credit cards and loans you are applying for?
The FICO credit score is calculated with the use of an equation which consists of five components or aspects with different weight. Each of these aspects tells the lender about your credit history.
Payment History (35%)
About 35% of your score is made up of your previous payment history. This includes information about if you are paying your bills on time and if you are covering the full balance or just the minimum payment.
Amounts Owed (30%)
This component within the credit score shows how much of the credit you are allowed you use. If you are exceeding your limit, you are considered to be a higher credit risk. If you use a lower percentage of your credit, this will have a positive effect on your score.
Credit History (15%)
This factor is all about the length of your credit history. This includes how long you have had an account and how well you are managing it. The longer you have an account, the better.
Credit Mix (10%)
This means the mix between mortgages, credit cards, and other loans you have. Do not take a new loan to improve your score. This category has only a small weight in the overall equation.
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New Credit – (10%)
It is fine to open a new account occasionally. However, if you are applying for too many at the same time or in a short period, this increases your risk level. Such changes are reflected in your credit score.
In your life, your credit score may change and go up and down. The fluctuation depends on how well you manage your finances, including how reliable you are at repaying credit cards and loan installments. Every new loan or mortgage you get will be reflected in your credit score. It will then report on how you take care of this new loan, and how you deal with this new responsibility.
Your credit score will follow you all your life. That’s why it requires good care. Remember, this number will determine your insurance premiums, whether you are approved to live in a new home, or if you can buy your dream house. Thinking like a lender and knowing what affects your score will help you improve your life and financial well-being.
Credit Score Basics
Now you know how important it is to have a good credit score. But what does the term “good credit score” even mean?
The scores generally range between poor (300) and excellent (850). Higher scores mean long and consistently good credit history, on-time payments, and low use of credit. Lower scores indicate clients who are considered risky because they have missed payments or use a lot of their available credit.
There are guidelines for good and bad scores. For example, most lenders may consider scores above 720 excellent and those below 630 as high risk. The average credit score for the past year (2018) has been 700. Although scoring models are different, a typical range is between 300 and 850. If we look at FICO, a score of 670 is good. Of course, the higher the number, the better.
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Here is a Breakdown of FICO Scores by Experian
- 800 to 850: Excellent
- 740 to 799: Very good
- 670 to 739: Good
- 580 to 669: Fair
- 300 to 579: Bad
If your score is 620, this means you have bad to fair credit. However, if your score reaches 700-750, this is in the middle of the very good to excellent range, and lenders will see you in an entirely different way. Even a small change into good, not excellent credit will give you an advantage.
Even people with excellent credit scores continue building them because they want to have a cushion instead of being borderline. That’s because of the fluctuations we already mentioned above. If you have a credit score of 800 and some income to ensure you can support your payments, you will be treated like a celebrity.
What This Means for You
If your credit score is in the good, very good, or excellent category, it’s essential to keep it there. Far too many people get comfortable and start skipping or delaying their credit card payments, which starts impacting their score. Just one late mortgage or credit card payment could cause an application to be rejected. It could also cause extra fees and high-interest rates to be charged if you refinance a mortgage, get a loan, or apply for a new credit card.
An excellent score opens many doors, and can even help you qualify for premium credit and rewards cards, get low interest on loans, and more. However, the process of getting this credit score takes some time. The journey to raise your credit score can be a real marathon. The best way to start is to have a look at where your score stands at the moment.
Once you have an idea and a goal where you need to get and how much you need to grow, you can use the following tips, tools, and strategies to get you there.
Tips to Improve Your Credit Score
Check Your Current Status
Before you even start with your credit repair, you need to know where you stand. So, the first step is checking your credit. This means ordering and looking at your full credit report. It is best to get a free credit report from all major credit bureaus. You can get these once a year. Some sites also offer free credit reports, but these can be deceptive, so only trust the sites recommended by the Federal Trade Commission. Several tracking apps can also give you a pretty good idea of your credit score.
Keep Your Payment History Clean
As you can see in the percentages we discussed, payment history is the component with the most weight. So, it has the most significant influence within the most common scoring models. To keep your payment history clean you need to stay on top of payments and keep the debt to a minimum. This will show the lenders that you are responsible, and you will probably repay your loan or credit card on time.
Your payment history and credit score are a reflection of your ability to pay on time and pay back debts diligently and effectively. If you put yourself into the shoes of the lender, this will give you a good indicator of what a client is like, and how responsible they are with their debts.
To get a high credit score, you need to avoid late payments, foreclosures, defaults, repossessions, third party collections, and filing for bankruptcy.
It is normal to forget a bill sometimes, but if you want to increase your credit score over time, it is best to set up automatic payments. If you cannot cover a full bill every month, set up payments for the minimum amount. You can pay the rest later, but don’t skip the payment altogether.
Track Your Credit Utilization
You need to make sure you are not using too much available credit. This reflects in your credit score and becomes a risk factor. The credit utilization ratio is an essential component in calculating the credit score, so it will affect the final number.
A good utilization percentage is below 10% for FICO, and 30% or less in VantageScore. So, if you keep it around 10%, this means you will do well in both scoring models. However, there is a significant difference: with FICO, there is no difference between clients who pay in full each month and those who carry a balance. However, with VantageScore, this is taken into consideration.
Credit bureaus typically get monthly reports by credit card issuers. Therefore, once your creditor notifies the bureau of the improved utilization ratios, this will be reflected in your score.
If you want to keep this component on the right track, set up alerts ( from your bank or credit card company, which can be sent by email or text message. Then, you will get a notification when your balance is nearing the limit you set. This will help you stay on top of your overall credit utilization and check your other credit factors regularly.
Keep the Old Debts
You have paid off your credit card debts or student loans, then that’s great! Don’t try to remove any trace of it from your credit report. It is better if these credits stay on your report.
If you have paid everything on time, those credit records may boost your score. Having an account with a long history of timely payments and a solid track record shows responsible habits that lenders and creditors are looking for.
Bad debts that usually negatively impact the score are removed over time. However, things like bankruptcies stay on it for ten years, while repossessions and foreclosures are reported for seven years.
Another thing to keep in mind is that when your credit rating is calculated the time you have had a credit with each creditor is taken into consideration. You will get a bonus if you have long-history and timely payments with each creditor. Even if your account is inactive or you don’t use it at all, don’t be quick to close the account. The same is valid for your unused credit cards. Still, you wouldn’t want to have too many accounts opened if you only use one or two. The longer your credit history is the better.
Score Boosting Tools
If you have a limited credit history, this may be a disadvantage. In this case, you can use score boosting tools like Experian Boost or UltraFICO. These allow customers to expand their profiles with other financial information. Clients with low credit scores and limited history will benefit most from these new tools, but they are not made to mask poor credit habits and behavior. They are meant to boost your credit score based on existing financial information.
What you need to do to take advantage of Experian Boost is to connect it to your online banking. You then let the bureau use all your bills and utility payment history and add it to your report. With UltraFICO, you allow it to access your banking data and savings accounts, which will be considered when calculating your final score. The entire process doesn’t take more than a few minutes, and your credit score will be updated instantly.
The record of recurring payments will help improve the payment history of the consumer, as well as the length of their credit record. Most people who decide to use these tools will instantly notice a change in their credit score. The program collects only positive payment entries. Another plus of using these tools is that the new data can be removed at any time.
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Be Careful with Your Applications
Every time you apply for new credit or loan, this will be reflected in your credit report and will temporarily lower your score. This adverse effect may last between 6 and 24 months.
One thing you can do before applying for a new credit card or loan is to research your likelihood of approval. You don’t want to risk your credit score if your application gets denied. Also, don’t apply for several credit cards in a short time frame, especially before taking out a mortgage or a larger loan.
When you search for a personal, auto, or mortgage loan first make rate comparisons, and research your options thoroughly before you apply. This way, you will keep the hard inquiries to a minimum.
Take It Step By Step
Raising your credit score is not going to happen quickly. It is a process that requires you to develop good habits and to be responsible with your finances; this will help you achieve an excellent score.
The oldest account on your report and the average age of your file are essential for your credit score. So, you need to have credit for at about 10-20 years before you see a positive change in these categories.
Unfortunately, it takes a very long time to improve a bad credit score and very little to destroy a good one.
The way to success is to establish good habits and be responsible. Apply for new credit cards only when you need them and make all your payments on time, and you will see this effort reflected in your score.
Keep An Eye on Your Credit
Monitoring your credit is very important. Keep an eye on your credit report, because there you will be able to see all your accounts in one place. Review them frequently and see how the score fluctuates. Those monthly fluctuations will help you understand how well you are managing your finances and credit, and what changes are needed.
As long as you pay your bills on time, keep your credit balances modest, and apply for new credit only when necessary, you will end up with a good credit score.
Bonus Tips
Joint Accounts and Divorce
It is common for married couples to have joint credit card accounts. This step means that the credit scores of the two people in the marriage will influence each other. Joining all your accounts when you get married makes financial management much more manageable. Unfortunately, in case of divorce, this may bring many challenges, especially if you share a credit card or mortgage.
Even if you obtain a legal divorce, this doesn’t release any of the people from their financial responsibilities when it comes to paying off debt. As long as the account is kept in both names, both people have their obligations.
Before the divorce is finalized, make sure all debt is paid off and close all the joint accounts. You could also leave only one person’s name on an account. The next step for both parties is to re-establish their credit. This will take some time, but the important thing is to start slowly and build it up over a few years. Don’t jump into applying for new credit cards, a new mortgage, or a car loan immediately after the divorce. This won’t have a positive effect on your credit score. Try to spread out these actions over the next six months.
When a spouse dies, their name is not removed automatically from the joint account. It will be necessary to contact each creditor and request this action. In some cases, the living spouse needs to reapply for the credit card or loan as an individual borrower. Usually, joint accounts that included a deceased person will be flagged within the creditor’s system by Social Security after the death is reported.
Check Your Report for Errors
Correcting Inaccuracies and old information is one of the fastest ways to improve your credit score. Check all your credit reports, and if you spot incorrect information, you need to initiate a dispute and have it corrected or removed within a maximum of 30 days.
Raise Your Limits
Raising credit limits is not a good idea if you tend to overspend. If you raise the limit on one or several credit cards, the credit utilization number will improve. Keep in mind that this will have a positive effect on your credit score only if you don’t feel tempted to use your newly available credit.
This strategy won’t work if you have missed payments with the same issuer. Furthermore, it won’t work if you have any other issues regarding your fees and payments, or if there is a downward trend on your score. Your request for a credit limit increase may be seen as that you have problems with liquidity or being in financial trouble. So, your situation must be stable before you ask for this increase. If you have been a great customer for a long time, and your score is doing pretty well, this strategy is worth trying.
Talk to Your Creditors
If you find yourself in a difficult financial situation, don’t be afraid to talk to your creditors. They are not your enemies; creditors are in the business to earn a profit. They can help you because you both have the same interest in eliminating your debt. If you cannot pay your bills, this is not good for them either. Creditors can be understanding and willing to assist if you communicate openly and on time. So, instead of skipping a payment, contact the creditor and see if you can agree on a resolution that is acceptable for both sides.
There are cases in which creditors have agreed to reduce the interest rate or to reduce the minimum payment. They may also waive extra fees and charges for late payments, or even allow clients to skip a month of payments. There is a lot they can do for you, so be open and communicate your issues. Forcing the credit card company or bank to turn your debt over to a third party collector is not a good idea. It will have a long-term negative effect on your credit score.
No Credit History? Here’s What To Do To Build One
What happens if you don’t have any credit history? You’ve got to start somewhere because a positive credit history will be positive for your financial future. This is true whether you are trying to rent a place, buy a car, or purchase a home.
The first step, in this case, is to apply for your first line of credit. The easiest types of credit cards to obtain are those for department stores and gas stations. These are a good start if you want to build a solid credit history. Remember, use them responsibly, make your payments on time, and don’t charge too much to your card. The key is to be strict about paying your bill every month.
If you get a NO for a traditional credit card, your next best option is a secured credit card. However, these do require a deposit, usually equal to the credit limit on the card. For example, you might pay $300 in deposit money and get a secured card with a $300 spending limit.
These cards act the same way as other credit cards (called revolving credit). You will receive a monthly bill and will be expected to make a payment each month. When applying for this card, make sure it is noted in the reporting agencies. You will need this record for building a credit score.
In most cases, if you are regular and diligent with your payments each month, you will get your deposit back when you decide to close the account. You can’t use the deposit for your monthly payments.
If you are working and have a regular paycheck, you can build a credit history if you take a loan for purchasing a car or other large purchase. Again, paying your bill regularly will help you establish a good credit history.
How Long Will it Take to Fix A Credit Score?
Improving your credit is a long-term game, and you will need to be patient about it. Typically it will take you about six months of good credit habits and behavior to notice a change in your credit score. Unfortunately, there is no faster way to change things on your credit, unless the negative information has been an error that will be removed in a month.
It is impossible to predict precisely how much time credit repair will take. However, it’s safe to say that the less negative information you have, the easier and faster the repair will be. Negative information includes late payments, frequent credit applications, bankruptcy, overspending on credit cards, and other items.
Of course, different actions have different effects. For example, if you miss several payments and the lender turns your account over to a collection agency, this will lower your score more significantly than missing a payment one time. These are situations with a different level of severity.
Here are some time frames for negative information and how long it stays on your credit report:
- Credit application inquiries remain on your credit report for two years
- Public record entries for seven years
- Bankruptcies for ten years
- Car repossessions for seven years
- Delinquent accounts for seven years
The damage to your credit score diminishes over time. Things like bankruptcy will have a much smaller impact in six years than they did after only one.
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Summing It Up
The credit score is not just a number, and it’s not static in any way. It is a snapshot that fluctuates and changes over time based on your credit habits and behavior. Turning around a low credit score can seem daunting at times. With the right strategy, determination, and a good plan of action, it’s possible to take control of your score and improve your financial future.
Start From Scratch
Start from the very beginning and check your credit to get a good idea of where you stand. Get your credit record and look into the details, check for errors, and dispute anything you find immediately. Then, focus on paying off your debts and making every payment on time. In the meantime, don’t apply for new installment loans, mortgages, or credit cards. Limit your use of credit to repair your score.
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No Quick Fix
There is no recipe or quick fix to improve your credit score. Sometimes you get in a situation when it is urgent and necessary to run up debt. Still, you need to anticipate these in advance so that you can start preparing early on. Negative information and records generally stay on your credit report for several years. Their impact becomes less when they age. But instead of counting on this, you want to focus on building your habits and good credit practices going forward.
The most important thing is to stick to your plan and remain patient. It may take several months or years for your credit score to change for the better. However, if you want to buy your dream home, start a new business, or reach a milestone in your life, all the effort will be well worth it.
Do you know what your credit score is? How do you plan to improve it?
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