How to Improve Your Credit Score
Posted on October 18, 2017 by CHS
Society is becoming increasingly more dependent on using credit to make purchases and determine eligibility. Today, good credit is used for much more than just getting a credit card or a loan. Many businesses, such as satellite or cellular companies, require that you have good credit before they extend products or services to you. Many employers check your credit when you apply for a job. As a parent, one of your most important jobs is to provide a secure and financially stable home life for your family, and having good credit is an integral competent of financial stability. A good credit score shows lenders that you have a history of paying your bills on time, while a low credit score will show that it is risky to give you a loan because you have a history of not paying on time. With a good credit score, you can provide your family with a loving home, a safe and reliable vehicle, and conveniently take out lower-interest loans when needed.
Your Credit Score
A credit score is a numerical value that is based on the analysis of a person's credit files. The credit score is then used to represent the creditworthiness of an individual. The most common credit score you will see is the FICO score, which is calculated from the Fair Isaac Corporation. FICO scores can range from 300 to 850 and it is provided by one of the three major credit reporting agencies – Equifax, Experian, or TransUnion.
When you have a FICO score that is higher than 680, it indicates you are in a good standing, while any scores above 740 could give you the best rates on loans. The five major factors that influence your credit score and the percentage of influence they have are: your payment history (35%), level of debt/credit utilization (30%), age of credit (15%), mix of credit (10%), and credit inquires (10%). Even if you were to have a low credit score due to poor money management in the past, you can still repair it. However, like losing weight, raising your FICO score will take time and is not something that can be fixed right away. To the following are suggestions for how you can improve your credit score.
Obtain a Copy of Your Credit Report
Before starting anything, it is best to figure out where you currently stand with your credit score. You can obtain a free annual credit report at Annual Credit Report and see if there are any errors that need to be disputed. Review and make certain there are no late payments listed incorrectly on any of your accounts, as that can lower your credit score. To dispute any discrepancies, contact the credit bureau.
Reduce the Debt You Owe
If you have a history of bad money management with debts piled up, you must pay those off before trying to improve your credit score. You should stop using your credit cards while you pay off your debt. Review your account statements to determine the balances and interest rates for each of your accounts. Devise a budget and plan to make payments towards the debt with the highest interest rate first, while paying minimum payments on your other accounts. Paying off all of your debt might take some time, but once it is paid off, you will feel more productive and confident about your money management.
Keep Your Credit Card Balance Low
Many people believe having a high credit card balance is fine as long you are able to pay your full balance each month. However, a high balance can raise your credit utilization. Credit utilization is how much credit you have versus how much you are spending. For example, if you have a credit card balance of $400 and your credit limit is $1000, your utilization ratio for that card would be 40%. It is recommended to have a lower percentage of credit utilization, the optimum is 30% or lower. Since high balances are more difficult to pay off, it tells lenders that there is a higher risk of you not fulfilling your payments. The best way to keep low credit utilization is by keeping a low credit card balance – below 30% of your credit limit is best. Read more about credit utilization at Understanding Credit Utilization.
Pay Bills on Time
Your payment history is 35% of the factors that makes up your credit score. Make sure to pay all your bills on time. This includes your mortgage, utilities, auto loans, credit cards, student loans, and any other bills you may have. Even if you are a couple of days late with your bills, it can have a negative impact on your credit score. If you missed any payments, then pay them off as soon as possible. The longer you consistently make your payments on time after having been late, the more your credit score will improve. Over time, the poor marks caused by late payment will fade away as you establish a good payment pattern, so it is not the end of the world if you happened to forgot one payment for a couple of days. Keep in mind that your record remains active for 7 years.
Don’t Close Old Credit Cards
It is logical to think that since you have a new credit card and you won’t be using your old one anymore that it would be smarter to close that old account. However, closing your old credit card can actually lower your credit score. This is because15% of your credit score is determined by the age of your credit, meaning that a longer credit history will improve your score. Closing the old card also means you are lowering your available credit , and this can result in a risk of receiving a higher credit utilization ratio.
Open New Credit Cards Responsibly
As your credit score improves, more options for credit cards will open up to you. However, it is crucial that you stay smart about opening a new credit card because it can impact your credit score. Only open a new card when you need it, and not because you want to create a mix of credit. For example, if you are planning on flying somewhere, it may be a good idea to open up a card that offers rewards like airline miles or cash back for rebates. It is not a good idea to open too many credit card accounts as each inquiry you make creates a dent in your credit score.
Credit Card over Debit Card
Although both cards seem similar, they both have different functions. When you use a debit card instead of a credit card, it does not build any credit history or provide you with any benefits like receiving cash back. When your debit card is stolen, you may potentially be liable for all the purchases made illegally on your stolen debit card. Your credit card can get refunded faster because your bank is dealing with credit as opposed to cash. However, if you are in the process of paying off your debt, it would better to use your debit card instead of a credit card. This will allow you to track exactly how much you are spending, which will help you make smarter purchase decisions.
Rebuilding your credit score is a long term project, not a short term fix. Stay patient throughout the process and follow through on all the above tips. As mentioned in the beginning, improving your credit score is like going on a diet, it is not something that can be fixed overnight.
In early September, it was reported that one of the credit reporting bureaus, Equifax, was hacked. What this means is that if you have a credit report, even if it was not from Equifax, you may be one of the 143 million Americans whose personal information may have been exposed. According to Equifax, “the hackers gained access to people’s names, Social Security numbers, birth dates, addresses, and even some driver license numbers. They also got credit card numbers for 209,000 people and dispute documents with personal information for 182,000 consumers.” To see whether your information was exposed, you can go to www.equifaxsecurity2017.com, which will include a Potential Impact tab that allows you to enter your last name and the last six digits of your social security number to tell you if your information was exposed. When entering your personal information online like this, make sure you are on a secure computer and internet connection so that you can protect yourself from potential hackers.
If your information was exposed, sign up for the free credit monitoring given by Equifax which will allow you to monitor your credit for one year. The enrollment for free monitoring will only be open till November 21, 2017. However, one year of free credit monitoring is definitely not enough as your personal information, like your date of birth or Social Security number is yours for a lifetime. It is recommended that you sign up for multiple free credit score services. You can find a list of free credit services here, provided by Rob Berger, a contributor to Forbes and a founder of both a personal finance website, and a credit card and banking website.
Another way to protect yourself is by placing a freeze on your credit. What this means is that your file cannot be shared with potential creditors. This can prevent identity theft. Once your credit is frozen, even if someone has your name and your social security number, they cannot open or establish credit under your name. In the state of California, a security freeze is a free service for victims who have filed a police report for identity theft. If you are not a victim and you are under the age of 65, then there is a cost of $10 to place a freeze on your credit with each of the three credit bureaus. This would result in a total cost of $30 as there are 3 credit reporting agencies. You can learn more about freezing your credit at How to “Freeze” Your Credit Files. Learn more about the Equifax hack in this article from Forbes and the Frequently Asked Questions (FAQ) about the incident provided by Equifax.
Below is additional information to better educate yourself about improving your credit score.