How to Improve Your Credit Score
Your credit score is a critical element of your financial health. At a glance, lenders – and you – can see your overall financial health and how responsibly you’ve used credit in the past. The higher your credit score, the more easily you are approved for new loans, and more likely to get better loan terms when applying. The higher your credit score, the better, so it makes sense to take control of your score and boost it as much as possible.
Boosting Your Credit Score
If you want a better credit score, there are many obvious first steps to take like paying your bills on time every time and considering debt consolidation. Getting a personal loan with a lower interest rate to pay off high interest credit cards might also lower your monthly payments, helping your finances in other ways as well.
But beyond timely payments and finding ways to pay off debt more quickly, you can make fast improvements to your credit score in many other ways as well.
Set up a means to monitor your score
You can’t boost your credit score if you can’t monitor it. Find an easy way to monitor your credit score through an existing or new financial institution.
Use less than 30 percent of your credit
Your credit utilization ratio is simply how much of your existing credit you’re actively using. The more credit you use, the lower your credit score. So use less! Ideally, you should be using less than 30 percent of your available credit every month.
Raise your credit card limits
If you haven’t asked for a credit limit increase lately, ask. Request a limit increase from each of your current credit cards. You don’t want to use the new credit, obviously. Instead, having more “room” on each card will help decrease your credit utilization ratio and improve your score.
Quit applying for cards and loans
Every time you apply for a new credit card or a loan, your credit score takes a small hit. Quit applying for cards or taking out new loans. Instead, use the ones you have wisely. It can take up to two years for hard inquiries to fall off your report, so take a break from applications.
Boost a thin credit file
If you don’t have much in the way of credit at all, you have a thin file. This is common among younger adults and those who have operated primarily with cash or through a partner’s credit in the past. You can improve and “thicken” a credit file by having some of your financial data, utility payments, and even your rent factor into your overall credit score.
Fixing Credit Report Errors
One way that can be a quick boost to improving your credit score is checking for errors on your credit report. While easy to fix, the first step is getting a copy of your report so you can review it and see if there are any issues.
Credit Mistakes to Avoid
You certainly don’t want to make a mess of your credit score in your attempts to boost it. As you are digging into your financial interests and working to improve your credit worthiness, avoid making mistakes that can hurt your score accidentally.
Closing old accounts
It’s tempting to pay off credit cards and immediately close the account to avoid temptation. If you close credit card accounts, however, you’re reducing your available credit which hurts your credit score. You’re also shortening the average age of your credit, which also hurts your score. Leave your card accounts open.
Consolidating higher interest debt
If you are considering debt consolidation, don’t take out a loan with higher interest and payments than what you’re currently paying for the credit cards. Paying more for the same debt can make it harder to pay off, which can hurt your monthly budget and not improve your credit score.
Not using credit
It seems logical that not using your credit cards at all or taking out any loans might show great financial practices and boost your credit score. In fact, the opposite is true. If you never use your credit, your credit score drops. It’s far better for your credit score to use your credit wisely than never use it at all.
Why Your Score Might Drop
Your credit score reflects your current and past financial health. Your score is always shifting and changing along with your credit card and loan accounts. If you notice a drop in your credit score, it could reflect any number of things.
Late payments – Since your payment history is weighted most heavily in your credit score at 35 percent, a late or missing payment can have a dramatic impact on your credit score. According to FICO simulations, missing a single debt payment after 30 days can drop your credit score 30-85 points. A payment that is 90 or more days late can drop a credit score up to 130+ points.
New loans – Recent inquiries for your credit score can lower your score. Inquires are worth 5 percent of your overall credit score, so the effects of hard inquiries will only drop your score small amounts, typically 5 points or less.
You’ve used more credit – Credit utilization ratio is how much of your credit you’ve used. If you’ve maxed out your credit cards, you have a 100% credit utilization, and your credit score can drop significantly. Credit utilization is weighted heavily in your score, so if you max out your cards, FICO estimates your credit score can drop anywhere from 45 – 130 points.
Your credit limit dropped – If one of your credit cards reduced your credit limit, even if you didn’t spend more on the card – your credit utilization ratio changed, and your credit score will drop. You can request a credit limit increase to improve your credit utilization ratio or pay down balances to bring this number back into alignment.
You closed a credit card – Closing a credit card dings your score in two ways. One is that it might decrease the length of your credit history, which is weighted at 15 percent of your overall score. The second is that you’ve decreased the amount of available credit you have, dropping your credit utilization ratio.
There is an error or legal situation – Sometimes bad things happen that are unrelated to your own activities. If you are monitoring your score and see a sudden drop that can’t be accounted for, there may be inaccurate information on your account if the lender made a mistake in reporting your payments. These can be resolved by disputing that information. There is also the possibility that someone has opened accounts in your name or stolen your account information and made you the victim of identity theft and fraud. This is a legal situation, of course, and will involve the authorities.
Credit Score Myths
You want to be in control of your credit score, which means you don’t want to fall prey to myths or rumors about your credit score. Don’t believe everything you hear about credit scores – here are some common credit score myths to avoid.
You only get one free credit score per year
The two credit bureaus in Canada, Equifax and Transunion, offer a free credit report once per year. Your credit score, however, will not be included with the credit report. If you want to monitor your credit score you have two choices: pay the fee required by the bureaus for your official score or monitor an approximate credit score through financial service companies. You can also find options for a free credit score from others as well.
Bankruptcy destroys credit forever
A heavy financial hit like repossession or bankruptcy isn’t taken lightly by the consumer, the bank or the credit bureaus. If you use a debt management program, your credit score will take a hit, but the change isn’t permanent. As you adopt good financial habits, your credit score will improve again. Eventually the bankruptcy or repossession will fall off your credit report entirely and you’ll have a fresh start.
Checking your credit score hurts your score
Yes and no for this one. If you are monitoring your own score by paying the bureaus or using a financial service to ballpark your score, you aren’t hurting your credit score. This is called a “soft” inquiry and won’t touch your score at all. If you apply for a loan and a lender officially checks your credit score, the “hard inquiry” will impact your score and continue to impact it for up to two years.
Paying utilities on time improves credit
Your utilities aren’t reported to the credit bureaus unless you’ve gotten behind, and those reports aren’t going to help you at all. Once payments are up to date, your credit report isn’t affected by your electricity or gas bill at all. Cell phone payments, however, can be reported to the credit bureaus, so paying your cell phone bill on time can improve your credit score.
The Difference Between Credit Scores and Credit Reports
While they sound similar, your credit score and your credit report are two different things, and the terms cannot be used interchangeably. Your credit score is a number between 0 and 900 that tells lenders immediately how well you’ve managed financial obligations in the past. Your credit report, on the other hand, is a statement that lists your various loans and credit accounts with information about your payment history and balances.
While it has its limitations, your credit score is designed to “grade” your financial habits. If you’ve been responsible with loans and credit cards, your credit score will reflect this. If you’ve struggled to make payments on time or gotten overextended, your credit score will be significantly lower. While there are ways to make improvements to your score in the short term, the best way to improve your credit score is to adopt good financial habits. With the right financial habits, you’ll enjoy control of your money and your credit score.
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