If you have a low credit score, you can experience problems when trying to apply for a credit card, car loan or mortgage. If you do get accepted, you will pay a higher interest rate than someone who has a good score. For example, a FICO score of less than 579 is rated as a poor score. Credit scores range from 300 to 850. A score of 680 or above is considered good and 740 or above is considered excellent.
How Are Credit Scores Calculated?
The data in your credit report contains information on any credit accounts, this includes loans, credit cards, collection debt and more. All of the items on your credit report are used to calculate your credit score. The data collected is sent to the three major credit bureaus, Equifax, Experian and TransUnion. Your score may differ slightly at each credit bureau, but they will be similar.
Your score is calculated by looking at your payment history, your balance on each account, your credit utilization rate, length of credit history, recent applications for new credit, your credit mix and other factors. The score is continuously updating as your credit profile changes. So how can you improve your score?
Monitor Your Credit
Before taking steps to improve your credit score it is important to get a copy of your credit reports and set up online accounts that allow you to monitor your credit score. There are several ways you can monitor your score. Many banks and credit card companies provide access to your credit score. Sign into your accounts to retrieve that information. You can also sign up for Credit Karma and Credit Sesame. Both give free access to check your score.
https://www.creditkarma.com/ & https://www.creditsesame.com/
You are entitled to a free annual copy of your credit report from each of the three major credit bureaus. Space the reports out between those bureaus so you can get a copy every 4 months. Go to https://www.annualcreditreport.com/index.action to request your copies.
Note: During the Covid pandemic all three bureaus offered free weekly credit reports and that is currently still in place.
Review your reports and if any inaccuracies are found contact the credit bureaus to file a dispute. You will be required to provide documentation showing what information is incorrect. Once a dispute is filed the credit bureaus have 30 days to complete their investigation. If the inaccurate information was negatively impacting your credit score you should see an increase in your score once the corrections are made.
Pay on Time & In Full
Your payment history has a large impact on your credit score. Pay your bills on time, every time and always pay in full when possible. Don’t charge anything to a credit card that you cannot afford to pay. Think of a credit card as a tool to build credit and earn cash back and rewards points.
Be Careful with New Credit Inquiries
Each time you apply for credit or ask for a credit increase an inquiry is made. This can be a soft or hard inquiry. A soft inquiry does not affect your credit score, but a hard inquiry may. If there are multiple hard inquiries in a short time period, it can lower your credit score.
A soft inquiry can happen when you apply for a new credit card, when your employer or insurance company checks your credit or when you rent a home or apartment and the landlord does a credit check.
A hard inquiry can happen when applying for a mortgage or an auto loan. There is nothing wrong with applying for a loan, just try to space them out so there are not numerous hard inquiries at once.
Credit Utilization
You should aim for 30% or less. Credit utilization is calculated by dividing the total debt you owe by the total amount of available credit. Payment history and credit utilization are the two biggest factors in determining your credit score.
Don’t Have Too Many Credit Cards & Avoid Closing Accounts
Don’t apply for every credit card that is offered to you. This is especially true for store cards. Many times, when shopping they offer a discount if you sign up for their credit card. Skip it. Instead use just a few cards that offer low interest rates, cash back and reward points and that don’t charge a fee. Use those to pay your bills and pay them off in full each month.
If you do have older cards you don’t use, consider using them for small purchases just a few times a year to keep them open and active. Credit history plays a significant role in your credit score so when you close an account it can have a negative impact on your score, although your score should drop by just a few points and recover over time. You should close any accounts that you don’t use if they charge an annual fee.
Experian Boost
Normally, payment you make for phone service, streaming services, utilities and rent are not included in calculating your credit score. Experian Boost is a program that uses your payment history for those services giving you more tools to increase your score. It is unique in that it only uses positive, on time payment history and does not include late payments.
The length of your credit history plays a big role in calculating your score so adding these types of payments help to build a record of active, paid on time accounts.
Catch Up on Past-Due Accounts
If you are behind on bills and payments, work on paying them off. Late payments have a negative effect on your credit score, and they can remain on your credit report for up to 7 years but paying those accounts off can help to boost your score.
Ask For a Credit Limit Increase
If you are in good standing with your credit card company, consider asking for a higher credit limit. When your credit limit increases, and your balance stays the same it lowers your credit utilization which has a positive impact on your score.
Become an Authorized User
If your spouse or parent has exceptional credit, consider asking them to add you as an authorized user on their credit card. When you are an authorized user the primary credit card holder’s payment history is reflected on your account. They don’t even need to give you access to their credit card. As long as they use the card and make payments on time it will serve as another tool to increase your credit score.
Pay Off Collection Accounts
If you have accounts that have been turned over to a collection agency, make it a priority to pay those off. Some collection agencies will be willing to negotiate a lower payment with you if you pay off your balance. Be sure to get everything in writing.
The Tech Minimalist 