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For millions of Americans on the road to establishing credit, a low credit score is a major source of financial stress. Here are Tips For Improving Your Credit Score.
For millions of Americans on the road to establishing credit, a low credit score is a major source of financial stress. If your credit score is low, it can affect your ability to get a home or auto loan, rent an apartment, and even influence your job prospects. A low credit score can also result in higher interest rates and prevent you from getting the best terms on credit cards and other loans.
Alternatively, a good credit score could potentially save you thousands of dollars in interest charges over your lifetime. Fortunately, while it may take time and effort, there are steps you can take to raise your credit score.
Your credit score is a three-digit number (based on pre-set credit score ranges) that lenders use to assess your creditworthiness. What affects your credit score is your payment history, your total amount of debt, new credit, and the different types of credit you have.
A high credit score means you’re a low-risk borrower, which is why lenders are more likely to approve you for a loan or credit card with a low-interest rate. On the other hand, a low credit score means you’re a high-risk borrower, which is why lenders may deny your loan or credit card application or charge you a higher interest rate.
There are three main consumer credit bureaus: TransUnion, Experian, and Equifax. These credit bureaus generate reports for lenders based on consumers' borrowing habits, payments, and credit history.
Each credit bureau uses different credit scoring models, but there are two main types of credit scores that are most widely used in consumer lending decisions: FICO® Scores and VantageScores. FICO® Scores are the most widely used, so for our purposes, we'll focus on those.
FICO® Scores range from 300 to 850, and the higher your score, the better. Here’s a breakdown of where each score falls:
If your score falls in the very good or exceptional range, you’re in great shape. If your score is in the good range, you may be able to get approved for some loans and credit cards, but you’ll likely pay a higher interest rate. If your score falls in the fair or poor range, it will be difficult to get approved for any new credit. It’s highly recommended that you reach out to a credit repair service if your score is this low. (You can sign up for a free credit score and personalized credit recommendations on Kredit).
There are several things you can do to raise your credit score. The following are some of the most effective methods.
This can yield fast results in terms of improving your credit score. Ideally, you should keep your credit utilization (the amount of credit you're using compared to your overall limit) ratio below 30%. Why? Credit card companies get worried when a consumer tallies on too much debt in a single month. The more debt someone takes on the more likely they are to roll over their balance and potentially miss payments.
You want to have a low balance when your card issuer reports to the credit bureaus. Achieve this by paying off your balance in multiple payments throughout the month, instead of one lump sum, and use Kredit to help you identify which specific days of the month are best for you to make your payments so as to maximize your utilization strategies. Yes, you read that right. Credit card companies report back to bureaus on different days so you can technically pay one card off by the 1st and another by the 5th of the month. This way, you can keep your balance from rising above 30% and can contribute significantly to your credit-building efforts.
This should be obvious, as payment history is one of the most important factors in determining your credit score. This includes credit card bills, student loans, auto loans, and any other type of debt you may have. If you have a history of making late payments, it will negatively impact your credit score. On the other hand, if you always pay your bills on time, it will definitely improve it.
Closing credit cards that you don't use can hurt your credit score because it increases your credit utilization. Take, for example, a scenario where you have two credit cards with a $2,500 limit on both ($5,000 total) and a $1,000 in debt, split between two credit cards. If you close one card, your total limit is now only $2,500, with the 1,000 in debt. This would make your credit utilization 40%. You’ve effectively doubled your utilization, which will drag down your score.
So what should you do if you don’t use a certain credit card anymore? If the credit card has an annual fee you should call the company and tell them you’re considering closing the account. They will present you with retention offers and most of the time waive the annual fee. This should buy you time in paying down debt so you can close your credit card account without hurting your utilization.
If the card costs you nothing then leave it open!
Another option is to work with a reputable credit repair to help you improve your credit score. These services can assist in removing inaccurate information or derogatory marks from your credit report, negotiate with creditors on your behalf to have late payments removed, and give you an actionable game plan on how to raise your credit score
Another way to improve your credit score is via "credit piggybacking." This is when a relative or friend with a high credit limit makes you an authorized user on their account. Even if you don't have access to the funds, their credit account will be added to your credit report, which will raise your limit and lower your utilization.
If you have a thin credit file, your credit score could increase significantly using this method. Just make sure the account holder has a history of on-time payments.
There’s no one-size-fits-all solution for improving your credit score, as everyone's personal circumstances are different. These are just a few of the most effective methods. Be sure to closely monitor your credit report regularly to check for errors and dispute any that you find. A good credit score is an important part of overall financial health, so taking steps to build good credit now will positively influence your financial success in the long term.
Intelligent, digital-first credit-building solution that delivers a better experience and better results. All you need is a credit monitoring plan to get started.
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