One of the first steps you should take on the road to financial strength is to check your credit score and identify ways to improve it.
Having a good credit score can help you qualify for lower rates of interest in all kinds of financial products, from mortgages to loans for cars and credit cards, reducing your monthly payments and helps you free up money that can be used to cover other expenses or channel your savings. bill. A high score can also make it easier to rent an apartment or apply for a new job.
As pandemic protections are coming to an end, it is a particularly important time for many people to work on their credit.
Homeowners have until September 30 to apply for mortgage forgiveness. The last moratorium on eviction was overturned by the Supreme Court, which means that tenants in arrears in the payment of rent facing the prospect of being forced to leave their homes unless they can get emergency assistance for rent. (Borrowers of federal student loans now have until February to start making payments again.)
Improving your credit score doesn’t happen overnight. Whether you’ve taken advantage of these borrower protections or not, now is the time to work on your score. These steps can help you get started on the path to a better financial future.
How to increase your credit score
Your credit score is meant to tell lenders whether you are a high-risk or low-risk borrower. Both FICO and VantageScore (the score developed by the three major credit bureaus: Experian, TransUnion, and Equifax) will range between 300 and 850. Both scoring companies consider a score of 700 “good.” The better your credit score, the better rates. interest rates and better conditions will be offered by lenders.
1. Pay your bills on time
According to Experian , payment history is the most influential factor for both your FICO and VantageScore. From a lender’s perspective, an established history of on-time payments is a good indicator that you will also handle future debts responsibly.
“You want to avoid things like late payments, defaults, liens, foreclosures and third-party collections,” says John Ulzheimer, credit expert, formerly of FICO and Equifax. “And filing for bankruptcy is a horrible idea. Anything that indicates a default on a liability will hurt your credit score. ”
2. Keep your credit utilisation rate low
Assess your balances against your credit limit to make sure you’re not using too much available credit, a practice that can indicate risk.
Ulzheimer recommends trying to maintain a utilisation rate of 10%. “The higher that ratio, the fewer points you’ll get in that category and your scores will absolutely suffer,” he says. “In fact, the people with the highest average FICO scores have a utilisation of 7%.”
The date your credit card provider reports to the credit bureaus can also affect your utilisation rate.
Ulzheimer notes that FICO scoring systems do not distinguish between those who pay in full each month and those who have a balance. Your utilisation rate at the time your issuer reports is what is used for your score. However, VantageScore does consider whether you pay in full or keep your balance month-to-month.
If you’re having trouble with high balances and increasing interest payments on your cards, consider consolidating with a 0% introductory rate balance transfer credit card , but make sure you know when and by how much the rate will increase.
3. Leave old accounts open
Once you finally get rid of student debt or pay off your car loan, you may be impatient to remove any trace of it from your report.
But as long as your payments are on time and complete, those debt records can help improve your credit score. The same goes for your credit card bills.
“An account that is paid in full is a good thing; however, closing an account is not something consumers should automatically do in the hope that it will have a positive impact on their credit score, ”says Nancy Bistritz-Balkan, vice president of consumer education and communications at Equifax. “Having an account with a long history and a strong history of paying bills on time, at all times, are the kinds of responsible habits that lenders and creditors look for.”
Closing a credit card account can actually lower your credit score, as you will now have a lower maximum credit limit. If you still have balances on other cards or loans, your utilisation rate will increase. It’s best to keep the card with a $ 0 balance.
Any bad debt that could negatively affect your score is automatically eliminated over time. According Ulzheimer, bankruptcies can remain on your credit report no more than 10 years, while late payments and defaults, such as collections, repossessions, foreclosures and liquidations remain on your report for seven years.
4. Take advantage of score improvement programs
The number of accounts and the average age of your accounts are important factors in your credit score, which can put those with limited credit history at a disadvantage.
Experian Boost and UltraFICO are programs that allow consumers to improve a low credit profile with other financial information.
After opting for Experian Boost, you can connect your banking details online and allow the credit bureau to add utility and telecom payment histories to your report. UltraFICO allows you to give permission for your bank details, such as checking and savings accounts, to be considered along with your report when calculating your score.
5. Apply for only the credit you need
Every time you apply for a new line of credit, a thorough investigation is done on your report. This type of query temporarily lowers your score. It’s not a good idea to apply just to see if you are approved or because you received a pre-qualified credit offer.
If it is a single strong credit pull, the drop will be slight. However, a series of rigorous inquiries could tell lenders that you are taking on too much debt. The effects of a strong credit pull on your score, according to a TransUnion representative, can last up to 12 months.
If you need to apply for new credit, research your approval probability to make sure you are a good candidate before applying. Get pre-approved or pre-qualified if possible, as in many cases this results in a soft rather than a hard credit pull. Soft pulls don’t affect your credit score You don’t want to risk having your score lowered for a denied application.
You should also refrain from applying for multiple credit cards on short notice or before you get a major loan, such as a mortgage.
When you buy a home, car, or personal loan, you can minimise difficult inquiries by making rate comparisons in a short period of time. Requests for the same type of loan within a designated time period will only appear as a single inquiry. According to FICO, this time frame can vary from 14 to 45 days.
6. Be patient
It won’t drastically improve your credit score overnight. The best way to achieve an excellent score is to develop good long-term credit habits.
According to Ulzheimer, two influencing factors that influence your score are the average age of the information and the oldest account in your report.
“You really need to have credit for a couple of decades before you max out those categories,” says Ulzheimer. “It takes a long, long time to improve a bad score and it takes very little time to destroy a good score.”
Establish good habits, like paying your balances on time, keeping a low utilisation rate, and applying for credit only when you need it, and you should see those practices reflected in your score over time.
7. Check your credit
When you view your own credit, a smooth inquiry is generated, which does not affect your credit the way difficult inquiries do.
Monitoring your score fluctuations every few months can help you understand how well you are managing your credit and if you need to make any changes. However, you should not base any financial decisions you make solely on your credit score.
“I wouldn’t recommend hanging all decisions on a credit score, but hanging all decisions on what matters,” says Jeff Richardson, a spokesman for VantageScore. “Focusing on your financial health and the health of your family is priority number one.”
How to check your credit report
You can get a free copy of your report at annualcreditreport.com .
Under normal circumstances, you could get one free report from each of the three major credit reporting agencies (Experian, TransUnion, and Equifax) per year. However, in response to COVID-19, you can access a free weekly report from any of the offices through April 2022.
Check your credit report to see if there are any mistakes that could be dragging your score down. If you find errors, such as payments that have not been posted, you can eliminate them by discussing the information directly with the credit bureau. They are obliged to investigate any dispute and resolve it within a reasonable period of time. However, keep in mind that only incorrect information can be removed from your report.
According to Richardson, each credit report will have the information you need to improve your score. “There are four or five bulleted statements about your credit profile that can help you make a road-map of what to do if you really are in a position where you need to improve your score,” he says.
You can also find a text or numeric code in your report, but without additional information about what it represents. These are factor codes and represent items that may be dragging your score down. VantageScore has a free website, ReasonCode.org , where you can enter the code for any credit report and get an explanation of what it means and tips on how to solve the problem.
If you are unsure whether there are errors in your report or are having trouble solving problems on your own, you can seek the help of an expert. Not only do credit repair companies know how to identify and correct misinformation, they can also help mitigate the impact of legitimate negative items on your report.