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.
|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
FICO uses the data from credit bureaus and uses this information to calculate your score. The three main credit bureaus are Experian, TransUnion, and Equifax.
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 Build 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.
- Among the factors that affect credit score, most include payment history and credit utilization ratios.
Apps that help you build your 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.
Average credit score Americans
Americans have different credit scores. In the past decade, the average credit score has been increasing, which is probably because of the improving economy. The average score has increased from 691 credit score in 2013 to the current 703 credit score. According to Experian, the average credit score of people between 20 and 29 years old is 662 FICO score while that of people between 30 and 39 is 673 FICO score. You can see this on the figure below.
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 balances on credit cards
Low credit utilization tells lenders that you are a good credit manager. This credit utilization ratio is a substantial credit score calculation. The figure is arrived at by adding all the credit balances and dividing the figure by the total credit limit.
To get your credit utilization ratio, check for credit card statements for the last 12 months. Add all the balances in the statements for every month for all the cards and divide the figure by 12. The number you get is the credit that you’ve use on every single month. You can further improve your credit utilization ratio by paying debts on time and maintaining small credit balance cards.
Open credit card accounts only when it is essential
Opening many credit accounts without any use might do you more harm than good. They may end up making your credit score worse than it was before. Unnecessary credit creates many hard inquiries in your credit report. In addition, they tempt you to overspend, thereby accumulating higher debt.
Keep credit card accounts open
Ensure that even credits cards that are not in use remain open. As long as they are open, they don’t cost you annual fees. When you close an account, it increases your credit utilization ratio. The average age of your account also matters a lot. As the account is growing old, it adds on to your points. Therefore, the older the account, the more points you get.
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. It is evident in the new version of FICO and VintageScore, which ignore paid collections. The best way to go about your debts is by paying off the latest accounts, which are likely to alter your score significantly. Non-medical collections also impact your score.
Some accounts only reset your credit score instead of improving them. Therefore, be careful with outstanding credit collections. Research before proceeding with outstanding collections.
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
Credit payment history and credit utilization ratio make up to 65 percent of your score. Maintain your credit utilization ratio at 30 percent and soon your credit score will start improving.