If your credit score is less than outstanding, you’ll feel the pinch when you apply for a loan or a new credit card. The importance of your credit score goes well beyond that, though: prospective employers and landlords, for example, will often request a credit report. If you want to lease a car, your credit history will play a large role in what terms you can negotiate. Even your insurance premiums are higher when your credit score is low.
Conversely, people with good credit have it easy in a variety of situations. Getting from here to there is a challenging feat, but it’s not rocket science either. Doing the right things consistently over time will improve your credit, inevitably and without fail. So, let us help you by showing you the way to a higher credit score, whether you need help in repairing credit as soon as possible or you’re strategically building a better financial future. Don’t waste money on expensive credit repair services: they will only give you the same advice as you’ll find here.
What Is a Credit Score and How Is It Interpreted?
Let’s take a moment to think of someone we’ll call Alan, who’s probably very like at least one person you know. When Alan says he’ll be at your house at 7 a.m, you can set your watch by the time the doorbell rings. When Alan borrows a car, he returns it washed and with a full tank of gas – and he’d rather take the bus unless driving is the only option.
Now that you have an image of Alan in your mind, let’s talk about Bob. Bob, for all that he’s a nice guy, is familiar with the concept of a calendar but never understood how it could be an important part of daily life. He invites you out for dinner and then forgets his wallet, and even though he promises to make it up to you, you know that he never will.
Using only this information, we can take a good guess at what their respective credit scores look like. The simple truth is that reliable people tend to be reliable almost all of the time, as well as vice versa.
Now, a credit card issuer or lender doesn’t have time to get to know Alan and Bob personally. As beancounters working for other beancounters, their personalities wouldn’t matter anyway. All that counts – and all that can count for an organization that processes thousands of new credit applications per day – is their credit reports. Their credit scores are a kind of 3-digit headline snapshot of their financial responsibility and how risky lending to them will be. In other words, the importance of your credit score is this: it’s the first and possibly only piece of information lenders and other people in a position to make decisions about your future will look at when deciding whether you’re worth taking a chance on.
This isn’t always fair: many people who resemble Alan a lot more than Bob have a poor credit history due to factors beyond their control, like the loss of a job or major medical bills in their families. Fortunately, some non-traditional lenders will indeed look at other parts of their financial circumstances, in particular their incomes.
What Are the Main Factors that Go Into Calculating a Credit Score?
Technically, it’s wrong to say that you have only one credit score. Scores can be calculated in a number of different ways, but almost all of them give pretty much the same result. The most widely used system is known as FICO, which is what we’ll be referring to in this article. A FICO credit score can range from 300 to 850, with anything below 620 considered bad and a number over 720 excellent.
What, then, makes the difference between a credit score a bank manager will love and one that makes him show you the door? While numerous factors come into play, about two-thirds of the typical credit score is determined by only two variables: your payment history and your credit utilization rate.
Payment history is self-explanatory: if you make a habit of delaying or missing payments on loans, credit cards, utility bills and so forth, this will generally be reported to the major credit bureaus and end up in your credit report. This becomes a definite problem if your account gets over 60 days past due or is referred to a collection agency.
Credit utilization rate is a slightly less straightforward concept, but equally easy to wrap your head around. If you have a credit limit of $ 5,000 on your credit card and owe $ 2,500 on it, your credit utilization rate (for that card) is 50%. The basic idea is that someone who has already qualified for credit, but doesn’t need to use too much of it, must be in a good financial position. A credit utilization rate of below 30% is generally considered good.
Credit utilization applies only to revolving debt, meaning an instrument that allows you to take out and repay money as you see fit. Good examples include credit cards and HELOCs. With other kinds of credit, like mortgages and car loans, the important number is called the debt-to-income ratio. As you would expect, this is simply the amount of borrowed money you repay each month divided by your gross (before-tax) income. This isn’t included in your credit report as such, but will certainly come into play when applying for a large loan. Ideally, this figure will be no more than 40%.
Aside from these major items, a credit report that lists a repossession, foreclosure or bankruptcy will take a hit of between 50 and 200 points. It’s really in your long-term interest to avoid these, as any of them make it very difficult to improve your credit afterward.
How Can I Give My Credit Score a 50-Point Bump Right Now?
Let’s take one common scenario: you need a loan in a hurry, but your credit report looks like it went 12 rounds with Mike Tyson. The interest rates and credit limit you qualify for aren’t all that pretty either, raising finance charges and increasing the risk of late payments (which will by themselves hurt your credit score). How, then, can you raise your credit in under a month, given that events from as long as seven years ago are still tainting your credit score?
The first step you need to take is to find out what you have to work with. Once a year, you’re legally entitled to request a copy of your own credit report from each of the three main credit bureaus: Experian, TransUnion, and Equifax. You can do this online, and it’s highly recommended that you make a habit of this: as many as 25% of Americans have at least a minor error in their credit reports.
Credit score companies rely on your card issuer, vehicle leasing agency, and other financial institutions for their information; sometimes, things fall through the cracks. If, for instance, you’ve paid off a bill that was way past due (called a “derogatory” account) but this wasn’t reported to the credit bureau, you can send them proof and ask them to fix it.
It’s also a good idea to avoid applying for new credit unless you’re both confident that you’ll be approved and that you’ll end up accepting the loan. This is because lenders typically run a “hard pull” on your credit, which indicates to credit bureaus that you’re about to expand your available credit in the near future. This will usually cause a dip of only about five points in your credit score, but this may make the difference between being approved for a new credit card or not. Lenders that advertise “no credit check” loans typically don’t run a hard pull until your loan application has been pre-approved, so you can get quotes from several of these without worrying about your credit score.
How Can I Boost My Credit Score By 100 Points?
If you want to improve your credit score by any significant amount, it’s essential that you start paying your bills on time, perhaps by automating these transactions. Missed or late payments from several years ago will still drag your credit score down, but less and less as time goes by. Your recent payment history counts for more in your credit report.
Apart from that, one of the best ways to raise credit scores quickly is to take a good look at your credit utilization rate. This usually means watching your credit cards and making sure you stay well under your credit limit. This applies to all your revolving credit but also to each individual credit card: if you notice that you’re using over 30% of your available credit on any one of them, try to pay it down or use another card for a while.
You may want to consider transferring large balances to a 0% APR credit card or apply for a personal loan to consolidate the outstanding amount at a lower interest rate. In the latter case, this also improves the “credit mix” item on your credit report: owing $ 10,000 on credit cards looks much worse than owing $ 2,000 on a card and $ 8,000 on an installment loan. This will reduce your monthly payments but, in the long term, this will only really improve your credit history if you have and follow a plan to reduce your overall debt.
Another credit card strategy is to ask for a higher credit limit: owing the same amount but being able to borrow more helps to raise your credit. Note that adjusting your credit card situation works relatively quickly, but any changes you make will still take some time to trickle through to credit bureaus and hence into your credit report.
Raising Your Score by 200 Points
The best advice if you want to raise your credit into a whole new bracket is to pay off as much debt as possible, thereby improving your credit utilization ratio. We’ve covered this already, especially as it applies to credit card debt, but there is another way to make your score climb a little more quickly.
One of the weaknesses of the credit scoring system is that reporting transactions to all or any of the bureaus is entirely voluntary. You can be pretty sure that the information on your monthly credit card statement makes it to them, as banks themselves rely on the credit score system’s accuracy, but what about stuff like your rent, phone, and utility payments?
Recently, it’s become possible to let credit bureaus know when you pay these bills on time and have them count as a bonus to your score. You may do this by granting a bureau access to your bank account, or by using an app that can help you with much besides.
If you’re really willing to commit to getting a better score, you can also consider taking out a credit builder loan. This is especially useful for younger people. Credit scores can only be calculated once people have a financial history dating back at least six months, but a relatively minor item can add a worthwhile number of points to your score even after several years. A credit builder loan is simply money you borrow at a low rate of interest without necessarily needing it for anything. The computer calculating your score doesn’t care; all it needs to see is that your credit limit is now higher and you’re making regular payments. Just bear in mind that the interest and other finance charges essentially come out of your pocket, and make sure that the lender you choose reports to all the major credit bureaus.
How Can I Lift My Credit Score to 800?
Once you have a really outstanding credit score, you will save thousands of dollars over the years on everything from mortgages to cell phone plans. Getting to this point takes time, though: it’s no accident that people’s average credit score rises with age.
This leads us to the concept of credit age: the longer you’ve had some particular credit card or loan, the better it looks to credit bureaus. This is one reason not to close credit cards you no longer use, assuming that they don’t cost you money in the form of a monthly account fee.
In the end, though, the only way to get a very high credit score is to improve your financial situation in general. Apply for a higher credit limit than you need, then resist the temptation to make use of it. Take on only debt you know you can pay back on time, live within your means, and pay your credit card in full every month.
What Is Good for Credit Score Improvements in the Long Run?
The above may seem complicated if you’ve never really thought about credit scores before. Nothing could be further from the truth: just doing the things that lead to financial prosperity automatically raises credit scores:
- Pay all your obligations on time.
- Don’t get suckered by how easy a credit card makes overspending.
- Use credit, but only when necessary.
- Check your own credit report for free once a year and fix any discrepancies.
That’s pretty much it. Following these guidelines isn’t always easy – if you’re hit with a major, unplanned expense or lose your job, you may have no choice but to let your credit score suffer, at least temporarily. With steady effort and a little planning, however, you’re sure to end up with a credit history to be proud of and end up paying much less in the long run.