If you ever plan to make a big purchase that will require a loan, such as a home or a new vehicle, then you will have to approach a lender to see if you qualify for one. The lender will check your credit history to determine your eligibility and your interest rate. If you have a good credit score, then you should have an easy time getting approved for a loan with a low-interest rate.
A low credit score, however, will make it tougher to get a loan. Any loan approved for people with low scores will very likely have a high-interest rate that adds a considerable amount to what they will pay by the end of the loan term. This is why it is important to improve your credit score and make it as high as possible and keep it there.
It’s tough to know whether you are improving your credit score if you don’t know what it is. You can buy a report of your credit score or hire a credit monitoring service, but you can also simply check with your credit card provider or lender. Most of the time, if you have an existing loan or a credit card, they can easily provide you with your score.
According to federal law, you can obtain one free copy from each of the three major credit bureaus each year. You should order these to check for errors that may be hurting your score. Such errors can include a misspelled name, accounts you don’t recognize, late payments you didn’t make, closed accounts that are listed as open, etc.
If you find errors in your report, then you need to report them immediately to have them corrected. Credit bureaus are legally obligated to correct mistakes in your reports, and this can significantly raise your credit score if the errors are serious.
The FICO score is the most common algorithm used by lenders to calculate your creditworthiness, but there is another called VantageScore that was created jointly by the three credit reporting bureaus (Experian, TransUnion, and Equifax). Some lenders will use this method instead, so it’s good to know this score, too, and see how it compares.
Past-due debts have a very negative effect on your score, and the longer they are delinquent the worse it gets. You probably know if you have any delinquent debts, but if you aren’t sure, you can verify them on your credit reports. Start paying on the oldest debts first, and then work your way forward.
Even one missed or late payment on any bill or credit card can negatively impact your score. You can call the credit repair companies if you make such a mistake and ask them to stop reporting the late or missing payment to prevent it from damaging your score. They may not agree to do it, but you won’t know unless you ask.
Once your payments are up to date, you can put your focus on the cards that are closest to maxed out. Racking up a balance that is close to or at your card’s credit limit hurts your score, even if you pay it off in full, so high balances that carry over month to month need to be paid down to raise your score.
Credit utilization is the percentage of credit you are using out of the total amount you have available. The higher your utilization is, the harder it will negatively impact your score. Paying your debt down as quickly as possible will dramatically lower your utilization and boost your score.
A tax return can be a great opportunity to pay off a large part of the debt to help boost your score and reduce your utilization.
By using only a quarter of your available credit, you can keep your debt manageable while still building a credit history to help your score.
If your utilization is high, even when you are paying the debt off in full, the solution may be to ask for a higher credit limit. Just remember that an increased limit isn’t a license to spend more credit.
Another way to lower utilization is to open a new credit card to increase your available credit, and then use it sparingly. Make sure not to open more cards than you can manage, however.
A balance transfer can be a helpful way to pay down credit balances by getting a lower, or zero, percent rate of interest for the next year or so. It’s important not to rely on balance transfers too often because you can end up with too many credit cards to manage, and if you don’t pay the balance off in your interest-free period you can end up worse than before.
Applying for any new line of credit will ding your credit score, including store credit cards. Signing up for these on a whim for a 5 percent discount can end up really hurting your score, so keep them to a minimum.
Impulse buying can really rack up a credit card, and it can cause irresponsible utilization. Make sure to carefully consider purchases and buy strategically to manage credit utilization.
Applying for multiple lines of credit at once, including personal loans, credit cards, mortgages, etc., will drop your credit score down. Space out credit applications to keep the negative effects to a minimum.
It looks good for your credit score to use more than just one kind of credit. In addition to a few credit cards, you can also take out a small personal loan or buy some furniture with installment payments, but only if they fit your budget.
Your credit score improves as the age of your credit accounts increases, and closing credit cards can ding your score by reducing the age of your accounts. If you have to close some cards, try to close the newer ones and keep the older ones.
This is a credit card that uses the money you place in an account as a security deposit as collateral. You can get a credit line that is only as large as your deposit, or you can get a larger line based on your income and ability to pay. Secured credit cards can be a safer method of building credit.
Find someone with an existing credit account in great standing and become an authorized user on their account. This can help you take advantage of their great credit history, but make sure it’s someone you can trust.
If you are using your credit responsibly then you should be able to pay the balances off each month in full. However, sometimes this is a challenge so just make sure you are paying as much as you can each month.
If you can’t pay the full balance off each month, make sure you pay more than the minimum. This reduces the amount of interest you will pay and looks better for your score.
Making multiple payments a month can help reduce the average daily balance, which lowers the amount of interest you pay and helps your credit score too.
Your credit score is affected by all of your financial obligations, not just your credit lines. It’s important to pay every single bill you have, on time and in full. A history of timely bill payments slowly but surely increases your score.
Once you have your credit under control, don’t stop using it completely. If you stop using credit you won’t have anything to go on your report. This can actually hurt your credit score. Keep using credit, but do so responsibly.
Using these methods you can improve your credit score, in both the short and long term. A solid credit score will help you make big, important purchases throughout your life, so learning to manage your score now can help you for years to come.