Find here the steps you can take to improve your credit score. A good credit score is essential to get loans with lower interest rates or any loan at all. If you have a low credit score, there are steps you can take for your credit score to improve or even boost. Some of these steps can lead up to an immediate increase or your credit score.
What Is a Credit Score?
Your credit score is a three-digit number used by financial institutions and other lenders to decide your creditworthiness. A credit score is one of the most essential three-digit number in the United States. The three-digit number is developed by a company known as Fair Isaac Corporation (FICO). FICO is a public company that is valued at more than $9 billion.
The number is a must-have if you are thinking of borrowing money from a bank or online lenders. The lenders use the three digits to determine whether to lend you money and how much money they will give you. In this article, we will look at credit scores, how to improve your rating and the factors that help determine it.
Credit Score vs Credit History
Lenders look at two important things when deciding whether to approve you for a loan or credit card: your credit score and your credit history.
Your credit score is a number that helps lenders judge how reliable you are with credit. It’s calculated using information from your credit report, such as how promptly you pay your bills, how much credit you use, and how long you’ve had credit.
Your credit history is a record of your borrowing and repayment behavior. It includes details about your credit accounts, like when you opened them, how much you owe, and your payment history.
What’s an Average Credit Score?
According to FICO data, the average credit score in the United States is 714. Approximately half of the population in the US possesses a credit score of 714 or above. A credit score of 714 falls within the “good” range, indicating a high likelihood of qualifying for various types of credit.
What’s a Bad Credit Score?
A credit score is considered “bad” when it is below 670 on the FICO score. This means there is a higher chance of not being able to repay loans or credit cards, and lenders may be less likely to approve your credit applications.
Several factors can influence your FICO score. It’s important to check your score often to ensure it’s correct. If your score is low, there are actions you can take to make it better.
|FICO Base credit score||Rating|
|300 to 579||Poor credit score|
|580 to 669||Fair credit score|
|670 to 739||Good credit score|
|740 to 799||Good credit score|
|800 to 850||Excellent credit score|
Factors that Determine FICO Score
These bureaus receive information about all your loans and relevant bill payments from financial institutions like banks and online lenders. With this information, FICO calculates the score, which ranges between 300 and 850. Since its founding, FICO has issued well over 100 billion FICO scores.
What is a credit check?
A credit check in the United States is usually something that is done by a lender or creditor to assess an individual’s creditworthiness. The process involves obtaining a copy of your credit report from one of the three major U.S. consumer reporting agencies: Equifax, Experian or TransUnion. This report provides information about your payment history, your current debts, and other financial obligations that you may have, such as bankruptcies or tax liens (tax debts).
The first significant factor that help determine your credit score is your payment history. FICO looks at all the loans that you have taken and then looks at whether you have paid them. It also looks at your bills and whether you pay them on time. Your score will be higher if you pay the loans and bills on time. This factor alone is said to contribute 35% of the score. Therefore, you should ensure that you always pay your bills and loans on time.
The amount of debt that you have is essential because it helps to determine whether you can pay back money on time. If you have a lot of debt compared to your income, it means that you might struggle to pay back money. Therefore, you should ensure that you don’t owe too much. According to FICO, people with the best credit scores are those that have an average credit utilization ratio of below 6%. They also have three accounts with balances. This factor alone is responsible for 30% of your credit score.
Length of Credit History
This refers to the amount of time since you opened a credit account. The thinking of this is relatively simple. If you have a very long history of borrowing and paying money on time, you will have higher chances of not defaulting. If you have just opened a credit account, it means that the lenders don’t know much about you. If you are just getting started, we recommend that you open a credit account and then start paying the money on time. This accounts for 15% of your score.
Credit Mix is another important factor in determining your credit score. In this, FICO looks at the various types of credits that you have. This information includes the likes of mortgages, loans, auto loans, and credit cards. In general, borrowers that have a good mix of credit usually present less risk to borrowers. This factor is responsible for 10% of your score.
FICO also looks at the new credit when determining your credit score. This means that the number of credit accounts that you have will play a factor. However, this does not mean that you should open too many credit accounts. Indeed, doing this can lower your score because it will lower the average age of your credit scores. It could also signal that you are in financial distress. This factor accounts for 10% of your score.
“If you don’t take good care of your credit, then your credit won’t take good care of you.”
― Tyler Gregory
How to Improve Your Bad Credit Score
If you have a low or a bad credit score which disqualifies you from accessing loans, you may want to improve your credit score, a process that can take some time. In addition to long-term strategies, there are also some changes you can make to instantly improve your credit score.
- First, check your credit score online and understand the elements that make your credit score poor.
- Checking your credit score is for free and there are many websites you can use for this purpose. See for example CreditKarma.com and Credit Sesame. You can also receive your credit score through your bank.
Apps to improve credit score
- TheCreditPros offers credit repair, credit scores and credit monitoring services. They give you credit reports and personalized score insights, tools, and tips to understand your score and the next steps to take.
- The Extra Card app is another suitable option to build your credit score. It helps you to build your credit score with a debit card.
- Credit Karma comes with a good app that helps you to keep track of your score while giving you instant recommendations to improve it. It enables you to make better decisions.
On time payment of bills
Debts paid late for the last seven years can result in bad credit score. If you want to improve credit score, make sure you pay debts first before meeting other utilities. You can use automatic payment calendar reminders to make sure you do not forget to pay your bills.
Lenders are truly interested in knowing how reliable you can be when it comes to paying bills, especially bills related to your existing debts. This is because past performance is a good prediction of your ability to pay your future bills.
- To improve your credit score, start paying your bills on time before the due date. Paying after the due date negatively affects the credit score.
- You especially want to pay all your loans such as student loans on time and meet all your daily expenses such as rent and other utilities.
- Late or missed payments that are beyond seven years behind have less effect on your credit score.
Get credit and make cell phone payments on time
There is more you can do to boost your credit score. In addition to paying your debt-installments in time, you can also factor cell phone payments. A new service called Experian Boost lets you improve your credit score if you have been making utility bills and phone payments on time.
In order to this, you can link Experian Boost with your bank account to generate a report of your history in paying telecom and other utilities. You can then select those payments that you want to be added to credit score from Experian. Your new FICO score is generated immediately.
Register in Experian Boost and get access to FICO score and a credit report for free.
Maintain low credit utilization ratio
Your credit utilization ratio is one of the most important factors that lenders consider when determining your credit score. It is the percentage of your available credit that you are currently using. To get your credit utilization ratio, check for credit card statements for the last 12 months. A good rule of thumb is to keep your credit utilization ratio below 30%. For example, if you have a credit card with a $1,000 credit limit, you should try to keep your balance below $300. If you have multiple credit cards, you need to add up all of your available credit and then divide that number by the total amount you owe on all of your credit cards.
Keep credit card accounts open
Keeping unused credit cards open can help your credit score by reducing your credit utilization ratio and increasing the average age of your accounts. This is because the length of your credit history is one of the factors that lenders consider when determining your credit score. The longer your credit history, the better your credit score will be.
However, if you have a credit card with an annual fee that you are not using, you may want to consider closing it. You can still build your credit history and earn rewards with a $0 annual fee credit card. Some of the best credit cards with no annual fees include the Chase Freedom Credit Card, Discover It Credit Card, The Costco Anywhere Credit Card, Capital One SavorOne Credit Card, and American Express Blue Cash Credit Card.
Credit cards can be a great way to build your credit history and earn rewards, but it’s important to use them responsibly. Debit cards are linked directly to your bank account, so when you use them, you’re spending your own money. Credit cards, on the other hand, allow you to borrow money from the credit card company and then pay it back later. This can be a great way to build your credit history, as long as you make your payments on time each month.
Bonus tip: Adding your child as an authorized user on your credit card can help them build their credit history and qualify for a rental property at a young age. When you add your child as an authorized user, they will be able to use your credit card and their credit history will be linked to yours. If you make your payments on time and use your credit card responsibly, your child’s credit score should be in the 800s by the time they turn 18. This will give them a great starting point for qualifying for a rental property or other loans.
Use different types of credit accounts
Lenders want to see how you can manage different credit types. Student loans and mortgages fall in the kind of installment loans. Home equity and credit card are revolving credit. Therefore, mix different types of credits. For instance, take an installment loan and revolving credit. However, do not make a mistake of opening too many accounts at the same time. It will negatively affect your credit score.
Be cautious with outstanding collections
Paying your debts always in time is not necessarily a guarantee that your credit score will improve. Certain types of accounts, like collections accounts, can actually harm your credit score instead of improving it. This is because collections accounts are seen as negative marks on your credit report. When a creditor sells your debt to a collection agency, the agency reports it to the credit bureaus, leading to a potential decrease in your credit score by up to 100 points. The best way to go about your debts is by paying off the latest accounts, which are likely to alter your score significantly.
If repairing one’s credit is as easy as sending some dispute letters to the credit bureaus, then why doesn’t everyone have good credit —Tyler Gregory credit repair quote.
To improve or repair your bad credit score, what you need to do is understand what is impacting your score and then working to resolve the issue. The following are some factors that change the credit score that you might consider checking.
- Credit payment history
- Credit utilization ratio
- The age of your credit
- Types of your credit accounts
- Number of inquiries
Your credit payment history and credit utilization ratio are two of the most important factors that determine your credit score. They make up to 65 percent of your score. Your credit payment history is a record of how you have paid your debts in the past. Your credit utilization ratio is the percentage of your available credit that you are currently using.
Credit score FAQs
What is a bad credit score?
A credit score is considered “bad” when it is below 670 on the FICO Score. This means there is a higher chance of not being able to repay loans or credit cards, and lenders may be less likely to approve your credit applications. FICO Score is one of the most widely used credit scoring models in the United States.
What's a good credit score?
A good credit score is considered to be in the 700s and above. A good credit score makes it easier to qualify for loans, credit cards, and other forms of credit. It can also mean that you will be able to get lower interest rates on credit that you do qualify for.
What's the average FICO Score?
As of August 2023, the average FICO Score in the United States is 714.
What are the ranges of credit scores?
Credit scores range from 300 to 850, with higher scores indicating better credit. Categories include Poor (300-579), Fair (580-669), Good (670-739), Very good (740-799), and Excellent (800-850).
How do I improve a bad credit score?
Improving your credit score from bad credit to good credit can take time and effort, but it is possible. To improve a bad credit score, focus on making timely payments, paying your debt, using credit cards responsibly, disputing errors on your credit report, considering a secured credit card, and exercising patience throughout the process.
Can you improve credit score with credit card?
To improve your credit score with a credit card, follow these tips: Make timely payments, avoid carrying balances, keep credit utilization low, maintain a long credit history, apply for new credit sparingly, and dispute any errors on your credit report.
Does paying off credit card immediately improve credit score?
Paying off your credit card immediately can improve your credit score because it lowers your credit utilization. Credit utilization is the percentage of your available credit that you're using. A lower credit utilization makes you appear more creditworthy, while a higher utilization may lower your creditworthiness. By paying off your credit card right away, your credit utilization decreases, positively affecting your credit score. However, if you already have a long history of timely payments, the impact may be less significant.
Do certain credit cards build credit faster?
Yes, certain credit cards can help build credit faster than others. Credit cards designed specifically for individuals with limited or poor credit history are often known as "secured credit cards" or "credit builder cards." These cards require a cash deposit as collateral, which serves as your credit limit. Since they are less risky for lenders, they are more accessible to people with lower credit scores.