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improve your credit score

6 Ways to Improve Your Credit Score

The quest to improve your credit score is one with lasting positive effects. Having a favorable credit history is key to good financial health.

It’s said: the higher your credit score, the better off you are.

As a consumer, you are probably well aware that your credit score plays a big role in daily life. It can calculate the interest rate you’ll pay for credit cards, car loans, and mortgages. Heck, it can determine whether you’ll get a loan at all.

Simply put, the three digits on your credit score are pretty powerful. Over time, they can save you tens of thousands of dollars, or cost you just as much. 

The director of public education at Experian, Rod Griffin, explains the impact of credit scores on loan acquisition. “Depending on your credit history, a 15- or 20-point shift could mean the difference between being approved or declined, having better terms or higher costs.

But getting a loan is only one reason having good credit is important.

 

Importance of Having a Good Credit Score

Along with savings and retirement planning, keeping an eye on your credit score is an integral part to having strong financial footing. 

Good credit is directly linked to your ability to access loans and the amount of interest paid on them. It’s helpful whether you plan to apply for credit or not.

Some things a good credit score can help you get include…

  • Unsecured credit card with a decent interest rate.
  • Balance transfer card.
  • Car loan or lease.
  • Mortgage for a home.
  • Capital to start a business.

Having a higher credit score can benefit in other ways like paying less for car insurance or passing landlord screening for home rental. 

Even if you’ve retired or own your home and think you’ll never need to use credit, think again. 

Situations change. You could lose your home due to natural disaster or have high medical bills resulting from an unexpected illness. 

When you neglect good credit maintenance, you’re tossing away an important financial lifeline.

Considering these reasons, it’s imperative to improve your credit score and keep it in order to unlock freedoms for a more comfortable life. 

 

What Is a Good Credit Score?

Credit ScoreOn a scale of 300 to 850, a good credit score generally starts at about 690. 

Two most common scoring systems, FICO and VantageScore, consider scores above 720 to be excellent. 

Here’s the breakdown…

300-629: bad

630-689: fair

690-719: good

720-850: excellent

Good credit standards may vary depending on lenders, such as credit card issuers and mortgage providers.

In practice, being in the “good” range is what will get you what you need or want.

 

Five Key Credit Score Components5 Key Credit Score Components

There are five key components that make up a credit score. Understanding why your numbers are where they are is important in knowing how to improve your credit score. 

  1. Payment history (35% of your score). Past repayment behavior is the best way to determine your ability to pay off new debts. 
  2. Amounts owed (30% of your score). Your credit utilization is the percentage of debt you carry. If your credit burden is high, lenders may believe that a good chunk of your monthly income is going toward debt repayments.
  3. Length of credit history (15% of your score). A long credit history is helpful (except when dinged by late payments and other negative items), but a short history can be fine, too, as long as you’ve made your payments on time and don’t owe a lot.
  4. Credit mix (10% of your score). Lenders like to see several different kinds of lines of credit on your report. Credit cards, student loans, auto loans, and mortgages make up a diverse credit portfolio.
  5. New Credit (10% of your score). Your credit history is reviewed when you apply for a new credit card, loan, or lease. This check itself shows up on your credit report, even if you were denied for the line of credit.

 

Why Credit Scores Drop

Credit scores drop for a variety of reasons. When you can pinpoint where you went wrong, you can be proactive in correcting your financial history. 

If you see a decrease in your credit score, it may be because…

  • Your credit utilization increased. This is how much you currently owe divided by your credit limit. Generally, a good credit utilization ratio is less than 30 percent, meaning you’re using less than 30 percent of the total credit available to you. For example, a credit card with a $1,000 limit needs a balance under $300 for good utilization.
  • You missed a payment on one of your credit accounts. Nearly 35% of your credit score sits on your payment history information. That makes it really important. Just one late payment can dip your credit scores big time, especially if you have good or excellent credit scores.
  • A derogatory mark was added to your report. Derogatory marks are negative indications on your credit reports. These can lower your credit scores and stay on your credit reports for quite a while, in many cases up to seven to ten years. Depending on the type of event, they can remain indefinitely. Derogatory marks include collections, repossession, and foreclosure.
  • You closed an old credit account. When you close a credit account, you lose the available credit limit on that account. This spikes your credit utilization ratio, which signals a risk to lenders because it shows you’re using a higher amount of your available credit.
  • You paid off your student or car loan. If the loan you paid off was your only installment account, you might lose some points because you no longer have a mix of different types of open accounts. However, this will not hurt your credit scores in the long term.
  • You recently applied for a new loan or credit card. Applying for new credit results in a hard inquiry on your credit report. Credit scores view hard inquiries as a slightly negative bit of credit history. The credit score drop is usually a temporary small hit. If you use your new credit responsibly, though, it should provide a boost. 

 

How to Improve Your Credit Score

The key to a good credit score is to have good credit habits. 

The following practices will help you improve your credit score and maintain it at a favorable number. 

#1 Pay bills on time. The biggest impact on your credit score is your payment history. Late payments can really do a number on your credit score and stay on your credit reports for years. If you miss a payment by 30 days or more, call the creditor immediately and arrange to catch up on the payment. It’s worth asking the creditor to consider not reporting the missed payment to the credit bureaus. If that’s not possible, get current on the account ASAP. Every month an account is marked delinquent hurts your score.

#2 Lower credit utilization. Making small payments or micro payments throughout the month helps keep your credit card balances down. This impacts credit utilization. When you keep utilization low instead of letting it build toward a payment due date, you could see an immediate credit score benefit. Requesting a higher credit limit or becoming an authorized user on a lightly used card with a large limit can also lower utilization.

#3 Keep credit accounts open. Closing your credit cards to improve your credit score could have the reverse effect because it impacts your overall credit utilization. Keeping older accounts open also helps your average length of credit history and significantly impacts your score.

#4 Avoid making several credit applications in a short time frame. Credit checks for the purpose of credit decisions can cause a small, temporary dip in your score, and several in a short time can add up.

#5 Monitor credit reports and dispute errors. Be consistent about checking your credit report. Set it on your schedule every few months as a reminder. If you discover an error or old negative information (most negative information falls off after seven years), dispute it. Such a mistake could be sinking your credit score. The credit bureaus have 30 days to investigate and respond.

#6 Mix up your credit. If you have only credit cards or only loans, consider getting the type of credit you don’t have. Having both installment accounts (you have equal payments for a set time) and revolving credit (you choose how much to pay, as with credit cards) can boost how credit worthy you seem.

Helpful Tools

Credit Report

The best place to start addressing your credit history is with a credit report.

You are entitled to a free report every 12 months from each of the three major credit bureaus: Equifax, Experian, and TransUnion

Use Credit Karma to view free credit reports and check them for mistakes, such as payments marked late when you paid on time or negative information that’s too old to be listed. 

With your report in hand, you can start with the tips mentioned to improve your credit score. An easy way to stay on top of it is to use a credit monitoring app. 

 

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