A credit score is similar to a student’s grade; the higher the grade, the more the benefits. Likewise, if the credit score is higher, an individual can enjoy more financial advantages than the one with a lower credit score.
What is a credit score?
A credit score is a three-digit number lenders use to help them decide how likely it is they will be repaid on time if they grant you a credit card or loan.
Credit scores are obtained with a formula whose variables are payment history, number of accounts, and the amount which is owed.
Its importance has increased because your credit score may affect the interest rate you pay to a lender and even make the difference between a loan being approved or declined.
Therefore, it is a paramount factor in your financial life.
As a thumb rule, the higher your scores, the more likely you are to qualify for the loans and credit cards at the most appropriate terms which, in return, will save you a lot of money.
Now, one might ask why he or she should improve their credit scores?
What benefit it will do to him or her?
And is the effort worth the gain?
To answer these questions, understand that credit scores are always considered by lenders.
This includes the banks who provide mortgage loans, credit card companies and even the car dealers financing auto purchases.
These lenders are determining whether or not to offer you credit and what the terms of the offer will be.
How does your credit score affect you?
In addition to taking loans or credit lines, credit scores can affect an individual in many ways.
For instance, to rent an apartment, you may need a certain credit score.
If the credit scores are dismal, you can be asked to put deposits down on utility accounts. You can even be denied for certain jobs, which is quite alarming and embarrassing.
You can indeed survive with a bad credit score, but it is not always easy and not cheap.
A good credit score will always help you save money and make your financial life much easier.
Below are some great benefits which you can get only with a good credit score.
- Low-interest rates on credit cards and loan
- Better chance for loan approval and credit card
- More negotiating power
- Approval for higher limits in borrowing
- Approval for rental houses and apartments
- Better car insurance rates
- Acquisition of a cell phone on contract with no security deposit
- Liberation from security deposits on utilities
- Bragging rights 😉
What is the best credit score you can get?
Most bureaus and companies would consider 850 the highest, but some scales may allow for a score of 900.
Now, after discussing the benefits of a good score, it is mandatory to know which one is a good score to have and to what extent or range it can go.
For this, FICO (Fair Isaac Corporation) provides a more accurate and reliable range of a credit score.
According to FICO data, the score between 300 to 579, is generally considered very poor. A FICO score of 580 to 669 falls in the range of fair score.
While a score between 670 and 739, is often deemed as good. For a very good credit score, the range must be in between of 740 to 799.
Similarly, for exceptional rating, the credit score must be 800 to 850.
Given all the FICO data, 67% of Americans have a good FICO score or better, and if you are not one of them, you must join this club.
How is your credit score calculated?
To improve your credit score, it is mandatory to know first how it is calculated. Only then we will be able to ameliorate it.
It is pertinent to mention here the fact that if you take money from a company as a loan the company will report this information to one or more of the three credit bureaus. These are Equifax, Experian and TransUnion.
Experian has a free 30 day trial where you can see your credit reports from all 3 bureaus and see what is impacting your score. You can sign up for free here.
With this information, these credit bureaus maintain your credit report which lists how much money you owe, what kind of account it is, and whether you have made your payments on time or not.
This report is then used by other companies such as FICO to calculate a credit score.
However, some parts of your credit report are important than others in calculating your credit score.
Below are the given factors that make up a credit score and the given percentage shows their importance.
- New Credit: 10%
- Credit Mix: 10%
- Length of credit history: 15%
- Amounts owed: 30%
- Payment history: 35%
As it is manifested above that some factors have a bigger contribution in determining your credit report, now you just have to plan about them for increasing credit score.
The good news is that this process is not too difficult, even if you have run into problems in the past.
The only thing you need is to understand how credit scores work; a little bit of time; and the discipline to follow through with a few good financial habits.
Improving your credit scores can take time, but the sooner you address the issue, the faster your credit scores will go up.
Now, it's time to discuss establishing a track record of paying bills on time, paying down debt and taking advantage of tools like Experian Boost.
This is a product that allows you to add utility and cell phone bills to your credit file. You can literally boost your credit score with the touch of a button.
In this article, however, we will discuss 8 ways, by which you can build credit fast.
Here are 8 ways to increase your credit score:
1. Use Self (Lender)
Self, formerly known as Self Lender can work magic for many people. It's pretty self explanatory...you lend yourself money in exchange for 12 or 24 on-time payments.
Confused? Let's look a little closer.
On-time payments account for 35% of your credit score. If you have any late payments (credit card, loans, etc) your credit is going to suffer!
With Self, you can open an account and essentially make monthly payments to yourself.
Each of these payments gets reported to all three credit bureaus.
At the end of the 12 or 24 month term (whichever you choose), you can withdraw your funds!
Now, you'll have a bunch of on-time payments and a basket of money to enjoy!!
Treat yourself. Oh wait...isn't this a personal finance blog? You should probably save that money 😉
How can you improve your on-time payment history?
Use Self. They won't do a hard pull on your credit report and nearly anyone can open a free account.
It's a great option if you don't have much of a credit history or need to build credit. You can also get a Self credit card without without a hard inquiry!
2. Make frequent payments
There is only one way to impress the lenders and that is by showing that you are responsible with credit, which is only possible by paying your bills on time.
As John Ulzheimer, credit expert at FICO and Equifax, once said, "Filing for bankruptcy is a horrible idea. Anything that would refer non-performance of liability is going to harm your credit score".
If you can pay micropayments or small payments throughout the month, this will provide a helping hand in keeping your credit scores high.
This method is coined as credit utilization carries a significant effect on credit scores.
In addition to this, if you can keep your utilization low instead of letting it build toward a payment due date, it should benefit your score immediately.
Your credit card provider may report to the bureaus on a day different from your due date and this could make your credit utilization look bad if you we're waiting to pay on the due date.
3. Check your credit reports
It may come as a surprise that you do not have just one credit score.
There are hundreds or even thousands of credit scores which are commercially available.
Regardless of the number of credit scores available, you only have three credit reports.
As the fraud and credit reporting mistakes usually happen, it is wise to check your credit reports from Equifax, TransUnion and Experian.
If a credit reporting error is found, you can take federal law's help to dispute the mistake with the appropriate credit reporting agency.
If the credit bureau deletes the incorrect and negative account from your report, your credit score will surely improve.
4. Become an authorized user
Becoming an authorized user can work best for people who have less credit limits & history. The impact can be significant on the overall credit score.
To become an authorized user, you must ask a friend or relative who has a long record of responsible credit card usage and also a high credit limit to add you to his card as an authenticated user.
This can be done without even telling the account number and thus it reduces the risk factor of anything in the account holder's mind.
For example, your mother adds you as an authorized user to her credit card with a $10,000 credit line and perfect payment history.
Now this card and payment history will show up or your credit report without you ever even receiving a card. If she's had the card for 15 years, that's 15 years worth of on-time payments and will increase your average account age.
This can boost your score significantly and very quickly by making one call to the financial institution.
This is tempting, but always be careful in picking a credit cardholder, that you do not piggyback onto a stranger's credit card.
If they have late payments or max out the card, it will negatively affect your score as well.
5. Take advantage of self-reporting
Apart from becoming an authorized user on a loved one's credit card, you may be able to add information to your credit report by self-reporting.
Lenders generally determine how well you handled debt in the past by the number and average age of accounts on your credit reports.
Therefore, those who have a limited credit history can find themselves at a disadvantage.
Free programs like Experian Boost and UltraFICO gives the leverage to boost a thin credit profile with other financial information and get you a good credit score.
Results may vary. Some may not see improved scores or approval odds. Not all lenders use Experian credit files, and not all lenders use scores impacted by Experian Boost.
Experian Boost leverages you to connect online banking data and give the bureau permission to include utility payments and telecommunications to your report.
Experian Boost can often raise your score 20+ points with the press of a button!
By the same token, UltraFICO enables you to permit things like saving and checking accounts alongside your report, when calculating your Experian-based UltraFICO score.
6. Do not apply for new accounts too often
Whenever an individual applies for a new credit line, a hard inquiry is initiated on his credit report, which bears the potential to lower the scores temporarily.
Applying for an account here and there won't be a big deal, but having 20 hard inquiries will look odd to lenders reviewing your report.
It is advisable to conduct a research of approval and to ensure that you are a good candidate before you apply for a new credit card.
Do not risk lowering your score for a denied application.
Sites like Credit Karma will give you a good idea of what cards you'll get approved for.
7. Reduce debt
Obvious right? But, hard when you're living paycheck to paycheck.
The amount of debt that you have taken or owe is another major stumbling block that lowers the credit score and is called a credit utilization ratio.
As the rule of thumb, keep this number low, and your credit score will grow exponentially. It is wise to pay off, every month, the credit card in the full.
By this, you can steer clear the risk of any interest as well.
Undoubtedly, it is a big ask and I feel your pain. Hang in there.
Below are some of the moves that you can make to boost your credit score:
- Ask your credit card issues to increase credit card limit
- Pay multiple payments throughout the month
- Keep card utilization level below 25%
8. Maintain a mix of credit accounts
It is important to mention here the fact that the type of credit you have, can also affect your credit score.
If you have more than one type of account, you are showing potential creditors that you can manage more than one type of debt.
However, this is not a huge factor, and can only have a trivial effect in building your credit scores.
This is just the cherry on top and won't be detrimental if you don't have the perfect mix.
Nonetheless, working to get the best credit score can be a time consuming process because the changes you make might not have the impact you expect.
One reason for this might be that the formula of calculating a credit score considers a whole wide range of factors.
So, it is wise to stick with the general rules listed above.
The bottom line is you will not earn a perfect 850 credit score in a night, but each step in the right direction could bring benefits.
Once you start moving from bad credit to fair credit and then to good credit, you can initiate to save money and take advantage of more opportunities.
To top it all, the best way to achieve and maintain an exceptional score is to develop good long-term credit habits.
These habits include paying your balance on time, keeping low utilization rate and applying for credit only when you need.
These are the rules of thumb, follow these and your score will improve gradually.
Leave a comment below if you have any specific questions.
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