Your credit score is vital. Even if you aren't looking to make a purchase right now, it is never too soon to start thinking about developing a respectable score. Or maybe you've made some bad financial decisions in the past and your score is less than stellar.
Whatever the reason might be, there are a variety of ways that you can improve your credit score and get the financial flexibility that will be important as you move forward in life. But before we go into those various strategies, it is important to ensure you understand how your credit score is measured, and that you are familiar with the key organizations that monitor your credit.
- FICO – The FICO score is a proprietary score developed by Fair Isaac Corporation and uses a range of 300 – 850. The lower the score means the higher the credit risk, and the higher the score, the more likely that a lender will offer lucrative or appealing offers of credit. The FICO score is believed to be the most widely used of all credit scoring systems in the United States with over 90% of lenders leveraging FICO tools. You can learn more about the FICO scoring system on myfico.com.
- Experian – Experian is one of the three credit bureaus in the United States, and leverages a similar algorithm to FICO with a few proprietary nuances. FICO and Experian partner together to provide scoring and credit reports. You can learn more about Experian's scoring system on Experian.com.
- Equifax – Another of the three credit bureaus, you can learn more about Equifax products at Equifax.com.
- Trans Union – This is the third of the three bureaus and you can learn more about their products at transunion.com.
When applying for credit, your financial institution will likely review scores from all three bureaus, with one of the bureaus being the primary (this will vary from business to business).
So, if your credit score is not where it needs to be, you need to make some changes, now.
- Ensure you have credit
- Pay your bills on time
- Keep your balances low
- Don't overextend yourself with too much credit
- Don't close out your unused credit cards (unless you have too many)
- Check your credit report on a monthly basis
The only way to get a credit score is to get accepted for some form of credit, and start leveraging it. An easy way to do this, and where most people start, is by getting a credit card. If you have a solid history with your bank, this is a great place to start. Once you are 18 years of age, you can work with your bank to apply for and receive a credit card with a low starting limit (usually $500 or slightly more). Then, the key here is to start using the card. If you are new to credit card usage, you should ensure that you are not spending more than you can pay. Many new credit card users pay off their balance in full every month. So why use a credit card if you have the money already? Quite simply, this is a strategy just to show the lender that you are responsible with your usage and can pay your bill on time, which brings us to the next point.
Creditors want to know that you are a low risk to them and that they can trust you to pay them back according to the agreement that you went into. And this isn't just about paying your credit cards on time. Equally important is timely payment of your mortgage, your utility bills, car loans, and so on. Any bill you have that has a repayment due date, counts.
Your credit is generally measured by how much you're utilizing over how much credit you have available to you. So, if you have a $500 credit limit and your balance is $480, your utilization is 96%. If your balance on that same card is $120, then your utilization is only 24%. A good rule of thumb is to keep your utilization below 30%. Not only is this good for your credit score, this is also good in the event of emergency where you need access to quick funds.
Once you get your first credit card and have more financial freedom, you might find it tempting to go apply for more and more credit cards. And while this will definitely open up your ability for spending, the act of applying for credit creates what is called a hard inquiry on your credit report. Creditors want to make sure you will be able to pay them back, and the more debt you take on, the more risk you pose and your ability to pay back in a timely manner goes down.
Hard inquiry – This is when a creditor reviews your credit score in the process of deciding whether or not to extend you credit,
Soft inquiry – This is when you look at your credit score on your own to understand what your score is. For example, if you seek out your credit score via one of the links provided above, this will not have a negative impact on your overall credit score.
Be thoughtful when deciding if you should close out a credit card that you no longer use. As long as you are not incurring annual fees or other expenses in keeping the card open, you may want to keep the card open for emergencies and to prevent an increase in your credit utilization ratio.
Leveraging FICO or one or more of the three bureaus already discussed, be sure to check your credit score monthly or at least once every two months. This step will give you insight into what your credit score is at the moment and also alert you if there are any innacuracies. You can dispute any discrepancies you see and it is highly suggested to do that as soon as you notice this. These disputes sometimes warrant alot of time to resolve so it is suggested to stay ahead of them.
Building a reputable score takes time. Most of us want to see our credit score at 750 or above, as this means that creditors are more likely to grant us credit at a lower interest rate. And rebuilding a poor score will take time, and that time will vary depending on why your score was low in the first place. Keep in mind the following:
- Do whatever you can to avoid delinquencies in the first place, as a delinquency will remain there for 7 years
- Bankruptcies can remain visible for up to 10 years
- Hard inquiries will remain on your credit report for up to two years
The longer you have an established credit score, and the better your financial behaviors are, the easier it will be for your score to rise. Newer credit-holders will need time to establish a credit history.
How To Clean up Your Credit Score Fast
There are a variety of ways that you can improve your credit score and get the financial flexibility that will be important as you move forward in life. Most of us want to see our credit score at 750 or above, as this means that creditors are more likely to grant us credit at a lower interest rate. And rebuilding a poor score will take time, and that time will vary depending on why your score was low in the first place.
And now, you want to buy a new car, or you want to take out a home improvement loan, or one of a variety of things you would want to do that require you to take out a loan, but your credit score is not where it needs to be. Maybe it is in the 600s and you worry about unexpected needs in the future. If your score is anything less than 750, you probably need to make some changes, but what do you do if you need to fix your credit score fast? If time is of the essence, and you need to clean up your credit score fast, start by doing the following:
- Check your credit report
- Pay down your balances and keep your balances low
- Pay more than once per month
- Increase your credit limit to improve your utilization rate
- Open a new credit card account
Leveraging FICO or one or more of the three national credit bureaus, pull your credit report. There is a chance that you may see some errors in the report in which case you can just file a complaint and, although it may take some time to resolve, this will help you keep your record clean. Always make sure to stay on top of this.
Your credit utilization measures the amount of credit you're using divided by the amount of credit you have available. So, if you have a $500 credit limit and your balance is $480, your utilization is 96%. If your balance on that same card is $120, then your utilization is only 24%. A good rule of thumb is to keep your utilization below 30%, so if you are trying to improve your score quickly, get your utilization below 30%.
This might seem counter-intuitive if you are already working to pay down your balance, but understand that credit bureaus (Experian, Equifax, and TransUnion) check your credit once per month, and you never know exactly when they are going to check. By paying more than once per month, it is more likely that the bureaus will see that balance starting to drop, and that means good things for your score.
If you aren't in the position to pay down your balance to below 30%, contact your creditors (ideally those with the lowest interest rates) and ask for an increase in your credit limit. Once your credit line increases, your utilization immediately drops as a result.
Assuming you can manage the responsibility of an additional credit line, consider opening up a new account. Bureaus are looking at the total utilization across all of your credit card accounts, so that additional card could work in your favor. Just remember that anytime you apply for credit, you are adding a hard inquiry to your account. This is when a creditor reviews your credit score in the process of deciding whether or not to extend you credit.
While you work through the above steps, make sure that you do not lose sight of the need to pay your bills on time. Creditors want to know that you are a low risk to them and that they can trust you to pay them back according to the agreement that you went into. And this isn't just about paying your credit cards on time. Equally important is timely payment of your mortgage, your utility bills, car loans, and so on. Any bill you have that has a repayment due date, counts.
Now that you have improved your score, it is important to make continuous improvements or maintain that high score. As we stated earlier, most of us want to see our credit score at 750 or above, so if you're not there yet, keep working through the strategies above to fix that credit score. Paying your bills on time, keeping your balances low, limiting the number of hard inquiries from incremental credit applications, paying attention to your credit report with a monthly review (at a minimum, review once every two months), and managing your debt will help you to keep that score strong, and will help it to continue to improve over time.
How To Repair Bad Credit
Bad credit can hold you back from so much. It makes home ownership and car loans nearly impossible, it can make getting a cellphone a huge hassle, it can even keep you from getting certain jobs. Fortunately, there are ways to repair bad credit and get your life back on track! And it's not as hard as you think, either.
- Look at your Credit Reports and Dispute Faulty Marks
- Request an Increase to your Credit Limit
- Get a New Credit Card
- Begin to Pay off Outstanding Balances
- Keep Credit Cards You've had the Longest
- Become an Authorized User on Someone Else's Credit Card
- Pay All of your Bills On Time
One of the first things you'll need to do to repair your credit score is to look at your credit reports. Each of the major credit bureaus (TransUnion, Equifax, and Experian) are required by law to give you a free credit report once a year. You can also use free services like Credit Karma, or even look to see if your existing credit card holder or bank offers the ability to see your credit score (most offer some kind of credit service nowadays).
Once you have reviewed your credit reports, there are several things you can do to immediately improve your credit score. First, dispute negative marks that are incorrect. Just because it's on your credit report doesn't mean it's set in stone, and it's not impossible that there is a negative mark on your credit report on accident. Credit errors can be disputed online directly with the credit bureau it appears on.
Even if a negative mark is correct doesn't mean it has to stay forever. For example, if the mark is a late payment, you can ask whatever agency submitted the late-payment report to the credit bureau to submit a request to remove it. It never hurts to ask!
One of the ways your credit score is calculated is by looking at how much debt you have versus how much credit (or ability to borrow) you have. For example, if you owe $1000 on a credit card that has a $2000 limit, you have $1000 in credit. If you ask the issuer of your credit card to increase your credit limit to $5000, then you'll have $4000 in credit. This, in turn, raises your credit score.
Most credit card companies will allow you to raise your credit if you simply ask. It's seen as giving you an incentive to use the card, which makes them money. This, of course, won't work if you have defaulted on the card already. Also, this method only works if you don't use the new available balance. Be sure to avoid the temptation to borrow more with a new credit limit.
This is essentially the same idea as increasing your credit limit. If you're able to open a new credit card, the available credit on that card counts towards your overall available credit, increasing your credit score. Again, this only works if you don't begin to carry a balance on the card, so resist the temptation to spend!
If you have struggled with getting approved for new credit cards in the past, an easy avenue to get a new card is to go through your existing bank. They'll usually have a low limit card meant specifically for people trying to repair or build their credit.
Let's say you can't get a credit limit increase on your credit card. Another way to raise your credit score is to start to pay off the outstanding balance on those cards. This increases your overall available credit which, in turn, will increase your credit score.
This method is likely the most difficult to accomplish. If you had the extra money laying around to pay off balances you likely wouldn't have a balance to begin with. Creating a budget and beginning to pay it off bit by bit will not only begin to repair your credit score but will also give your finances some breathing room as well.
The longer you have a credit card, the more positively it impacts your credit score. So, if you are looking to close credit card accounts to remove spending temptation, are trying to pay down balances and close cards that have terrible interest and poor or no benefits, then it is best to do this with cards you've more recently opened.
If you're struggling being able to open a new credit card, or simply are trying to avoid the spending temptation of available credit, becoming an authorized user on a trusted friend or family member's card is a great option. Being added doesn't require that you have good credit, but you still benefit from the primary cardholder paying their balance on time.
However, this can be a two-edged sword. If the primary cardholder is late on payments or defaults on payments, this will negatively impact you. If you are interested in this option, you need to be sure that you find someone who is financially responsible and won't further harm your credit score.
Moving forward, one of the easiest, and most important, things you can do to gradually repair your credit is to pay your bills on time. Late payments on your mortgage, credit cards, and even cellphone bills can be reported to credit bureaus and can impact your score.
However, if you are unable to pay your bills on time, there is some strategy in what bills you decide to pay. For example, your mortgage lender will almost certainly report your late payment to credit bureaus. However, your water utility company likely will not report a late payment right away. Even in tight financial times, you can pick and choose which bills to pay that will impact your credit score the least.
Following these few easy steps is a great way to repair your credit score. These steps not only can have an immediate positive impact on your score but will also gradually increase your score over time. Good luck!
