5 Ways to Improve Your Credit Score
Do you know all the ways having a low credit score can impact you? Sure, most of us know that it can make loans more difficult to get, cause our interest rates to increase, and maybe even stop us from moving into a new apartment.
What else can a low credit score do? It can increase the down payment for your monthly utilities. A low score can prevent you from getting a cell phone contract – or worse, getting a job. It can even make your car insurance higher, regardless of any claims.
Improving your credit score will improve your life in so many unseen ways. And improvement starts with education. Who controls your credit score? What does your score mean? How can you increase it? Start on the path to better credit with us as we jump into the world of credit scores in the United States.
Understanding Your Credit Score
The Managers of Credit Scores
In the United States, there are three credit bureaus: Experian, TransUnion, and Equifax. Here’s where it gets a little muddy: Experian uses only FICO® scoring, whereas TransUnion and Equifax use both FICO another more recent type of scoring called VantageScore. Even more confusing? Your credit score may not be the same between the three credit bureaus. When shopping for a loan, it’s important to check all three scores prior, so you have a clear idea of your different scores no matter what bureau the lender uses.
The most widely used scoring system by lenders is the FICO score; in fact, 90 percent of all lending decisions in the US rely on FICO scores. While it’s not well-known how the scores are calculated, aspects like your race, gender, job, and zip code don’t factor in.
Through these credit bureaus, you have access to a free credit report each year – but not your credit score. Your credit report is a document that holds information about your financial history, like bank accounts, loans, credit cards, and collections accounts. Here’s where you can get your free credit report.
To check your credit score, you can sign up for “free” score tracking with companies like Credit Karma and Credit Sesame – along with half a dozen others – but it may not reflect your true FICO score. In order to get that, you have to pay a fee.
What Different Credit Scores Mean
Those three little numbers in your credit score can have a big impact on your quality of life. If they’re above a certain threshold, the world is your oyster. Below a certain level? Things can get tough.
For simplicity’s sake, we’ll look at the FICO scoring system. FICO scores have two different groups of scores, one being the Base FICO score and one being industry-specific (auto and credit cards) scores. Base scores range from 300 – 850 while industry-specific goes from 250 to 900 – with the average American holding a base score of 687. Let’s look at the base FICO score ranges.
Exceptional (800+)
With a credit score this high, you’ve probably had close to zero late payments, all of your balances are paid in full, and you enjoy a low credit utilization. You get fast loan approvals, the lowest interest rates, plenty of credit limits, and get every benefit credit cards have to offer. The likelihood you’ll be delinquent is only about 1 percent.
Very Good (740 – 799)
While not a straight-A student, you’re still getting plenty of A’s with this credit score. Great rates and approvals aren’t really a problem. You make most of your payments on time and keep your credit utilization low. Only about 2 percent of people in this group may become delinquent.
Good (670 – 739)
While you’re still acceptable at this level – and fall into the “average” range – you may not get as low of an interest rate as the higher scores. You most likely won’t struggle with getting approved for a credit card or loan, though – you’ll just pay more to get it. Only about 8 percentare likely to become delinquent in this group.
Fair (580 – 669)
If you fall into this range, you’re aware of the struggle. Getting approval can be tough and if it does come, it’s at a high cost. You won’t get access to a lot of credit cards with perks, either. That’s largely because almost 30 percent of consumers in this group are likely to become delinquent.
Poor (579 and lower)
Without a deposit or paying a high fee, you may not be able to open a credit card or even begin service for home utilities. Getting loan approval is almost impossible. The main reason? Over 60 percent of people with this credit card may become delinquent.
How to Improve Your Credit Score
If your credit score falls into one of the lower score ranges – don’t stress! There are five ways you can start increasing your credit score, plus a few tips for maintaining it.
1. Pay Attention to Your Payments
Paying your bills on time, getting current with missed payments, and paying off collections all have a big impact on your score. Payment history makes up 35 percent of your FICO score calculation, meaning it’s the most impactful factor. Making payments can be difficult and sometimes calls for some financial creativity. One option is to get a payday loan or cash advance to help you bridge the gap between paychecks and avoid a late payment.
2. Keep Your Credit Utilization Low
In close second for impact on your score is the amount you owe – contributing to 30 percentof your score calculation. Keeping balances low on credit cards, paying off debt rather than moving it around, and the amount of credit cards you have open can all make or break your credit score. Keep your credit utilization at or below 30 percent; simply put, if you have a $2,000 limit on a credit card, keep your balance below $600. Also, don’t open new cards just to increase your available credit because that could actually end up lowering your score.
3. Closely Manage Your Accounts
Closing an account doesn’t make it go away and may be considered in your score. In fact, keeping accounts open may have a positive impact on your score because it lends to the length of your credit history, which makes up about 15 percent of your score calculation. When considering a new account, try to avoid hits to your score.
4. Fix Errors on Your Credit Report
Mistakes are just a part of being human but if those mistakes are on your credit report, it’s not something to shrug your shoulders at. In a study done by the Federal Trade Commission (FTC), 26 percent of people found an error on their report that made them appear riskier to lenders; that amounts to about one in four people. Request your credit report and go through it line by line to identify any potential errors, then follow these steps to begin the dispute process.
5. Rate Shop Quickly
When shopping for a loan, it’s smart to shop around. But each time you apply for a loan – even pre-approval – your credit score is being checked. If you time it wisely, you’ll finish your shopping within two weeks. Longer than that and the inquiries will come back as multiple inquiries instead of just getting lumped into one inquiry – with each deducting points from your score. If you fall into the Fair score category, these points may be just enough to knock you down to a Poor score.
It’s important to understand that you score is not going to increase overnight. It takes time to build those points, through responsible payments, credit utilization, and diligence. But it is worth it. As you go about your credit-improvement journey, LendNation is here to support you with a title loan, installment loan, or payday loan online or in-store next time you need cash.