Your credit score is a three-digit number that tells lenders how likely you’ll repay them on time. The higher your score, the better chances you’ll qualify on good terms, which will save you money in the long run.
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There are ways you can improve your credit rating, but it does take time. The sooner you implement the changes below, the faster your score will improve.
How Credit Scores Are Calculated
You have many, many different credit scores. That’s because they’re calculated with a mathematical algorithm, and each lender (or other financial company) uses a different algorithm to compute your score.
But don’t get too worried about your different credit ratings. Most scoring models use the same factors, so your credit scores will be within mere points.
There are some credit scoring models, like the FICO Score, that are very common. FICO uses the following five factors to determine your credit rating:
Payment history takes up 35% of your FICO Score. It looks at whether you pay on time and whether you pay in full, the minimum or somewhere in between.
The amount you owe weighs in at 30% of your FICO Score. It takes into account how much credit you’re allowed and how much credit you use. If you use less than 30% of your credit limit, FICO considers you a safe borrower. But if you use more than 30%, you’ll be deemed high risk and penalized.
Fifteen percent of your FICO Score is determined by the length of your credit history. The longer you have an account, the better your score.
Credit mix determines 10% of your FICO Score. You’ll get a better score if you have a mix of credit: cards, mortgages, auto loans, etc. But don’t take out another loan just to try to improve your score. You have to be able to afford it as well!
New credit makes up the last 10% of your FICO Score. It’s quite okay to open a new account occasionally. But it’s considered risky if you open several accounts within a short period of time, and your credit score will reflect that.
Credit scores typically fall between 300 and 850. Anything higher than 750 is considered excellent credit. Anything below 600 means you have poor credit.
To check your credit rating for free, click here.
If your credit score isn’t where you want it to be, there are a few things you can do to improve it. By implementing the strategies below, you’ll be able to access lower interest rates and higher credit limits.
5 Ways To Improve Your Credit Score
Before we get into what you can do to improve your credit rating, check your credit score. Pinpoint what factors are negatively affecting your score the most. This will help you understand the changes you need to make to get a better credit rating.
That said, here are five things you can put into action:
Lenders are very interested in how reliable you are at paying bills. They believe that past payment behavior is a very good predictor of future payment behavior.
If you’re behind on any payments, bring them up to speed ASAP. Late or missed payments will appear as negative information on your credit report and will stay there for seven years. However, their impact on your score wanes over time. That means older late payments have less of an effect than recent ones.
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If you don’t pay off your debt and your credit card balances are high, then the amount you owe is likely over 30%. This high percentage tells lenders you’re close to maxing out your credit cards, if you haven’t already, and you don’t know how to manage your credit well. So pay off your debt as quickly as possible, and keep those credit card balances low!
TIP: Become An Authorized User
If you have a parent or family member with good credit, ask if you can be an authorized user on their credit card so you can “inherit” their good financial behavior.
As we’ve mentioned before, don’t open accounts for the sole reason of having a better credit mix. Because it probably won’t end up improving your credit score. Why?
- Too many hard inquiries on your credit report lowers your score and remains on your report for two years
- It’s extremely tempting to overspend and accumulate more debt
TIP: Get Higher Credit Limits
Call your card issuer and ask if you can get a higher limit without a hard credit inquiry. This will decrease your “Amounts Owed” percentage.
Keep your unused credit cards open, as long as they don’t carry any annual fees, because closing an account may increase your “Amounts Owed” percentage.
TIP: Pay A Small Bill With Your Unused Card
Put any small recurring expense – like a $30 gym membership – on your credit card, then pay it off. Just make sure to pay the bill on time.
Check your credit reports from all three credit reporting bureaus (Equifax, Experian and TransUnion) for any incorrect information. Inaccuracies could pull your scores down. If you see any errors, immediately dispute the information. It takes 30 days for the credit bureaus to investigate and respond.
TIP: Check Your Credit For Free
Click here for the best ways to get your free credit report.
Bottom Line
Having a good credit score opens a lot of opportunities. You’ll qualify for great interest rates and terms when you borrow, and it’ll even affect how much you pay for life insurance. Some landlords consider your credit score when you apply, and mobile phone providers might look at your credit rating before they lease you a smartphone. Because your credit score is crucial to your present and future financial health, you should do your best to keep it in tip-top shape.
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