Improving your credit score
Credit score is a very important number that determines your creditworthiness to lenders if you are seeking a loan or your landlord if you are seeking to rent a real estate property. There are several ways to calculate a credit score. FICO score is one of the well-known numbers. FICO, which stands for Fair Isaac Corporation, calculates a number based on reports from the national credit bureaus – Experian, Equifax, and TransUnion. This number summarizes your risk of default. If your score is low, you have to put in some time and effort to improve your credit score. It will take some time but it is doable. This article will teach you how to improve your credit score.
Here are some of the factors that go into the calculation of your credit score ranked by their importance in the calculation.
Payment history – Bankruptcy, settlements, liens, foreclosures, etc. will cause your credit score to drop.
Debt burden – If you have more in credit card debt than your limit allows, or if you have not made your loan payments on time, your debt burden will be higher impacting your credit score negatively.
Length of credit history – A person with a credit card that’s only a month old and no other bills in her name will have a lower credit score.
Types of credit – Someone who is managing multiple types of credit – mortgage, auto loan, revolving, etc. – well will score higher that someone who isn’t.
Multiple credit enquiries – Applying for a credit card or mortgage causes a “hard pull” on your credit history. Having multiple hard pulls on your credit in a short time will negatively affect your credit score. However, there is an exception to this rule. If you are shopping for interest rate and have multiple lenders run your credit within 45 days, you will not be impacted by a huge amount.
FICO score ranges from300 to 850. The higher the score, the better the situation. A score above 700 is good and a score above 750 is excellent.
How to improve your credit score
Fixing a poor credit score takes time but be persistent.
Pay your bills on time and in full
That includes your credit cards, utilities, and medical bills. I know of an individual who closed a credit card account and paid the balance in full. However, there was an outstanding charge of $35 against the credit card that did not appear on the account the day he closed it. It remained on the account for more than a year accruing interest. He only realized about those charges when he saw his score was down during a credit pull for an auto loan. So always be on top of your liabilities.
I was once in a situation where we had to go to an Urgent Care clinic on a weekend. I had a copay of $25 but the receptionist said we would receive the bill later. We moved about a month later to a new location and forgot about it. Then one day, after more than 6 months, I received a call from their billing department. Apparently, they had been sending mail at the old address and it wasn’t being forwarded to our new address. Had they not called us to resolve the issue, the outstanding bill would have been sent to collection agencies and impacted our credit score adversely. Note that collection accounts stay on your credit history for seven years. Creditors typically send unpaid debt to collections after 180 days of non-payment.
Pay down your debt
Pay your credit card bills in full and keep credit card balance at a minimum. If you are struggling with payments make sure to pay off all minimums on your credit cards. Then pay off debt with the highest interest rate first. Don’t use debt to live beyond your means. Use credit cards but use them responsibly.
Don’t open new credit cards just to increase your credit limit or to move debt around. Too many hard pulls on your credit will lower your score.
Don’t close unused credit cards if there are no annual fees. The longer you have a credit card, the longer is your credit history and the higher is your credit score.
If you have no credit history, and no one to vouch for you, you can open a secured credit card and build a credit history slowly. Making timely payments on the secured card will help build credibility for an unsecured card.
Delinquencies remain on your credit history for 7 years; bankruptcies for 7 to 10 years, and credit pull records for 2 years.
Check your credit report once in a while to make sure there are no inaccuracies on it. Don’t wait until you actually need to borrow. That way you have time to correct any inaccuracies or improve your score. There is no penalty for checking your own score. Some websites offer services that help you check it for free.
There are some shortcomings of using the credit score as a measure of creditworthiness. The score can be manipulated. For example, the debt burden can be reduced if you are granted a limit increase without you actually paying down the debt. Also, the score doesn’t account for how it affects your risk as a borrower if future payments on existing debt were to increase. However, you should focus on legitimate ways of improving your score. This helps improve your financial wellbeing.
Here’s a buying a home checklist.