Credit Education- Steps to Improve Your Credit Score
Making Sense of Your Credit Score
You probably have encountered your credit score at some point in time. This is a three-digit assessment of your credit worthiness that has the potential to impact your financial health. Here are a few tips to understanding your credit history and credit score, and tips for improving both.
What is a credit score?
A credit score predicts how likely you are to pay off a loan on time.
Calculated using a mathematical formula called a scoring model that creates your credit score from information in your credit report.
Why is this important?
Credit score is used by lenders and credit companies that are considering doing business with you to determine how trust worthy a borrower or renter you will be.
Your credit score can affect your ability to:
Rent housing, get a mortgage, get a car loan, gain utility services and gain employment.
A good credit report and good credit score help to establish you as a trust worthy person to be in business with.
Your credit score is determined by 5 factors:
Payment history, credit usage, age of credit accounts, credit mix, and new credit inquires.
Raising your credit score takes time but will save you money in the long run!
7 Steps to Increase Your Credit Score
- REVIEW YOUR CREDIT REPORT (AT LEAST ANNUALLY)
In US, entitled to one free credit report per year from each of the three reporting agencies. Equifax, Experian, Transunion requesting one annually has no impact on credit score.
annualcreditreport.com is the quickest way to get reports or can call or download request form and mail in. When you receive a report, review it, look to make sure everything is accurate as errors do happen.
- Look for any accounts that are not yours or you didn’t authorize
- Incorrect or negative information
- Negative information that’s too old to be included (most negative info can be excluded after 7 years).
2.) DISPUTE CREDIT REPORT ERRORS
You may be able to dispute anything older than 7 years or if anything is inaccurate. There is no fee for filing a dispute.
Misspelled name or incorrect address is a simple fix
Costly errors on your credit report:
- accounts incorrectly reported late or delinquent
- debts listed twice
- closed accounts that are reported open
- accounts with an incorrect balance or credit limit
- federal law allows you to dispute inaccurate information on your credit report
You can submit credit dispute to company that reported the information and can also submit to a credit reporting agency.
FTC website has info on how to dispute credit errors, https://www.ftc.gov/
Consumer financial protection bureau has additional guidance here: https://www.consumerfinance.gov/
3.) PROTECT CREDIT SCORE
Avoid late payments at all costs!
Of the 5 factors credit score is based on, late payments history has the biggest impact on your score
- Always pay at least minimum balance due
- Never miss a payment
- Never be late on a payment
- Ideally pay credit card off in full every month if you can
- If you miss payment by 30 days or more, call creditor immediately
Ask to pay it up and creditor to no longer report the missed payment.
4.) APPLY FOR NEW CREDIT SPARINGLY
Every time you apply for credit, the lender does a hard inquiry or hard pull on your credit.
Hard inquiries show up on your credit report and can affect credit score since you are out there looking for more credit.
You become riskier to those that have already granted credit;
- Be thoughtful about when you’re applying for new credit and how you are planning to use it
- Don’t fall for in store promos that ask if you want to save money today by opening their store credit card.
5.) DO NOT CLOSE UNUSED CREDIT CARD ACCOUNTS
Closing credit card accounts can negatively affect 2 out of the 5 factors that determine your credit score.
The % of your total credit that you are using, lower the number the better the credit score.
-Age and length of credit history:
A longer credit history is better, closing unused accounts affects it.
In general, better to keep unused credit open, even if it is a zero balance.
Just be sure to keep watch on account so it hasn’t been compromised. Every 6 months or so you will to want buy something on card and payoff, keeps credit card active and so lender doesn’t close. Losing all that credit history which lowers account credit score.
6.) MAKE PAYMENTS THROUGHOUT THE MONTH
Pay early, helps keep credit utilization score low and improve your credit score.
A good credit utilization rate never exceeds 30%, the lower the better.
The score is based on both a per card basis and total across all of your cards available.
Ex. Two credit cards, one with $6,000 available credit and a second card with $4,000 available credit equals a total available credit of $10,000. Credit card companies will look at each card’s balance owed to not be above 30% but also as a combined total credit to not exceed 30% of credit available being utilized.
$10,000 total credit
X 30% max utilization
7.) ASK FOR HIGHER CREDIT LIMITS
Another way to reduce credit utilization score is based on the amount of credit issued and used.
REMEMBER: If you increase your credit limit and don’t spend more, you automatically lower your credit utilization.
Ask your credit company if by raising credit amount will be a hard inquiry/hard pull. It could reduce credit score by 5-10 points temporarily but will increase over long run since raising credit utilization ratio.
This doesn’t work if balance grows along with credit limit!
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal.
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