You can improve your credit score by taking a few steps in the right direction.
Knowing and understanding the credit score is equally important before taking remedial actions.
Improving your credit score will help you access better credit offers, lower interest rates, and larger mortgages.
In this guide, we’ll help you understand what a credit score really is, and how you can improve it gradually, and maintain it over time. Let’s dive in!
What is a Credit Score?
Your credit score is the summary of your credit profile. It shows your creditworthiness to your lenders and creditors.
The credit score is a three-digit numeral that shows your financial viability in terms of handling credit.
It shows your credit history’s strength in numerical terms. In other words, it is the summary of your credit history.
A credit score is calculated by two main credit scoring models FICO and Vantage after considering different factors.
These two models obtain your financial and credit reports prepared by three credit bureaus: Experian, Transunion, and Equifax.
Most lenders and creditors report to all of these credit bureaus. So, even if the credit score reporting models are different, your final score should be identical.
The most commonly used MyFICO score ranges from 300-to 850.
It is categorized as:
- 300-579 Poor
- 580-669 Fair
- 670-739 Good
- 740-799 Very Good
- 800-850 Excellent
Why Credit Score is Important for You?
Your credit score is the summary of your creditworthiness. Lenders and creditors will look at this score when deciding your eligibility for credit products they offer.
When you apply for new credit like a mortgage, auto loan, or credit card, this is the first thing that creditors will look at.
It shows your ability to repay the loans and make payments on time. It also shows which type of debtor you have been in the past.
Of course, lenders will look into other details when evaluating your loan application. However, your credit score is pivotal in helping them make the decision to proceed with your application.
FICO score bands: very poor, poor, fair, good and excellent. Illustration by loanza.us.
What Affects My Credit Score?
Before you can think of tactics to improve your credit score, you must know how it is calculated.
Knowing which factors affect the score will help you plan accordingly.
Your FICO score is calculated using the following formula.
Payment History – 35%
This is the largest contributor to your credit score which shows your late payments, missed payments, and on-time payment records.
Amount Owed – 30%
This is the amount of your total debt outstanding. The main factor here is your credit utilization rate which shows how much of the available debt you have utilized.
Credit History – 15%
It is the length of your credit history that accounts for 15% of your credit score. So, there is no shortcut for this factor anyway.
Credit Mix – 10%
The credit mix shows how many different types of loans like revolving credit, variable or fixed interest loans, and secured, unsecured or payday loans you have.
New Credit – 10%
New loans only account for 10% but lenders may want to see it to get a closer look at your recent credit history. Hard inquiries may hamper your credit score under this factor.
Your FICO score consists of 5 main elements, out of which 65% are your payment history and current debt. Illustration by loanza.us.
How Can I Improve My Credit Score?
Once you know which factors affect your credit score, you can now work to improve it. Keep in mind that there is no quick fix if you have a bad credit score.
These tips can help you build your credit score and set a strong financial foundation for you in the long term.
Join The Electoral Register
After looking at the elements of your credit score, this one may not be obvious, that’s why we’re mentioning it in the number one spot.
It’s the simplest and fastest thing you can action right now to improve your credit score.
The electoral register keeps a record of your personal details, such as your name, date of birth and address. This is helpful to confirm your identity in the process of a credit check.
Registering to vote is free, and can be done online. Sign up for the electoral register here.
Build Your Credit File
Take a few initial steps to build your credit file, if you have a thin or non-existent credit history. After joining the electoral register, you should open a few new credit accounts – if you don’t have any – to get things going.
However, you should choose the credit accounts wisely. Starting with credit-builder loans or using secured cards could be good options for those who have no credit history.
Check Your Credit Report
If you have a credit history and your credit score is bad, start with this step. It will help you assess two things.
First, you can look for errors and file disputes if you find any negative marks that shouldn’t be there. You may get protection if you see any fraudulent activity like opening a new account by an unauthorized person under your name.
Second, it will help you assess your current financial position and help you plan to improve your score.
Under federal law, you can request one free credit report every year from each credit bureau. You can claim your free credit reports here.
Check your Late Payments Immediately
Late payments are one of the most prevailing factors for borrowers with bad credit. You should also check out immediately if there are any past-due payments.
These payments can be for your credit cards, mortgage loan, or auto loan installments, but they can be for electricity or phone bills that you missed.
Pay the minimum payable dues that are past due dates first.
Pay your Loan Installments on Time
We cannot stress enough how important it is to pay your installment loans on time is. Consider it a tried and tested method if you want to build your credit score.
One missed or late payment, and your score could drop immediately. Consistent timely repayments will build your credit score up in time.
Paying on time is a financial habit that you must build as soon as possible.
Tip: Do not wait for the 3oth day to pay your minimum payment amount on the credit card.
Consistently paying your bills and loan repayments will make the biggest positive effect on your credit score. Illustration by loanza.us.
Control your Debt-to-Loan Ratio
The debt-to-loan ratio is your debt utilization rate. It is a percentage figure that shows how much of the available debt you have consumed.
Lenders keep an eye on your credit utilization rate when approving a new loan. It will affect your credit score in the long term as well.
Advisors suggest keeping a loan utilization rate under 50% and ideally around 30%. This means, that on a credit card that has a $1,000 credit limit, you shouldn’t spend more than $300 a month.
Bear in mind, that your credit utilization ratio applies to all credit products you have, not just a single card.
Do not apply for too many loans at once
When you shop around for loans, lenders may put in a hard inquiry. It will affect your credit score by a few points each time you apply for a new loan.
To avoid this effect, you should not apply for different types of loans at the same time.
However, if you want to compare loan offers for the same type, you should apply for these loans within 45 days. Credit bureaus consider these loan evaluations as only one.
Check for any Negative Items on Your Credit Report
Some negative items can remain on your credit report for years. There are no shortcuts to removing them from your credit report.
These negative items include:
- Hard inquires – 2 years
- Late payments – 7 years
- Bankruptcy – 7 or 10 years
- Collection account – 7 years
So, you can just wait out to get these negative points removed from your credit report.
Consider a Debt Consolidation Plan
If you have been struggling to repay your monthly installments of different types of loans, consider a debt consolidation plan.
A consolidation plan will restructure your existing loans into one large loan. Your loan terms will be readjusted with new loan terms.
This will help you restart without having any negative points like bankruptcy on your credit report.
Refinancing or restructuring may improve your credit score more quickly than other methods, too.
Close Loan Accounts that you no Longer Use
If your credit mix does not have many types of loans, this suggestion isn’t for you. Keep your different types of credit lines open even if you do not utilize them. It will keep your credit mix at a good rate.
However, if you have an adequate credit mix, you should close down unutilized loan accounts like credit cards immediately.
Store cards can also be considered credit accounts, so make sure you double-check this and close all store cards you don’t use.
Be Persistent
Finally, keep in mind that building your credit score is a process and not a remedy. It takes time to build a credit score and fixing it is even harder.
Keep a consistent plan and be persistent in your efforts for long-lasting success.
