Boost Your Credit Score
11 Steps to Gaining a Higher Credit Score.
It’s a sad truth that most people who have credit cards, mortgages, car loans, student loans and personal lines of credit haven’t the slightest idea about the significance of credit scores on their financial future.
According to survey conducted by Opinion Research Corporation, a leading U.S. marketing research organization, 27% percent understand what a credit score is, and how it impacts their financial lives.
So you shouldn’t be embarrassed that you don’t know the significance of your credit score – or even what a credit score is for that matter. After all only 27% of the American public knows; however it’s time to do something about it. That’s why I’ve put together the following facts about your credit score:
What is a credit score?
Your credit score, also referred to as your FICO score is an evaluation of your credit worthiness. It’s a 3 digit number that lenders use to evaluate your credit risk. A high credit risk is someone with a low credit score and a low credit risk is someone with a high credit score. Get it – the lower your credit score; the higher the risk that you won’t pay back the credit? Obviously lenders would be more wary of giving credit to an individual with a low credit rating; and more willing to give credit to someone with a high credit score.
Who evaluates my credit score?
Your credit score is calculated by the 3 leading credit bureaus in the United States - Experian, Equifax and TransUnion. Each credit report agency grades you based on a mathematical equation called the FICO evaluation (named for the company who created it the Fair Isaac Corporation). You are evaluated based on your credit history or past credit behavior – so your payment history, how long you’ve had credit, the various credit you have and your outstanding debts. FICO scores range from 300 (on the low end) to 850 (on the high end). Lenders will check your credit score with one of the 3 credit bureaus before granting you credit in order to assess your risk as a potential borrower. What does my credit score say about me?
Basically the closer your credit score is to the 850 high end; the less of a credit risk you are. Beth Givens, the director of the Privacy Rights Clearinghouse says that “the median credit score in the United States. is 723”. Givens also gives us the following rules of credit scores:
- Individuals with credit scores that exceed 720 are typically given the lowest rates and most flexible loan repayment agreements.
- However individuals with credit scores that dip below 620 are typically stuck with loans that have high interest rates and inflexible repayment plans. If your credit score is below 600 there are doubts that you’ll be approved for loans or credit cards at all.
11 easy tips to improve your credit score
Now that you understand how important it is to keep your credit score high, you can follow these simple 11 tips to make sure your FICO score remains above 720 or boost your declining credit score.
- Pay bills on time – every time – Missed or forgotten credit card and loan payments are referred to as defaulted. This means you have neglected to uphold your end of your borrower agreement and your credit score will take a blow because of it. If you regularly miss payments it will have serious effects on your credit score. If you have missed loan payments in the past, don’t worry, this is not the end of your credit future, however you need to shape up, or lenders will be shipping out as far as your offers for loans and credit cards go. If you start paying your debt payments on time you can raise your credit score as much as 15 to 20 points in a matter of a few months. The longer you prove you can pay your bills on time – the faster your credit score will improve despite past credit mishaps.
- Keep your debt low – It’s easy to put that designer handbag on your credit card, and if you have a special occasion coming up you might also charge a new outfit, shoes, make up, hair appointments…but it all adds up to one big credit card balance. Yes, a large outstanding balance (or debt) will negatively affect your credit score – especially if you max out your credit card (go over the limit). A maxed out card or high debt carried from month to month can lower your credit score by 50 to 70 points. It’s ok to carry a large balance over once in a while, but don’t do it frequently.
- Keep your hands off credit you don’t need – The offer of free money is tempting, but that’s just it it’s not free, and opening a bunch of new credit cards comes with consequences. If you apply for every new credit card that finds its way in your mail box, be advised that every new card lowers your credit score because it lowers your credit history (the length of time you’ve had credit).
- Lead an active credit life – The best way to prove yourself to creditors is by maintaining an active – yet stable credit life. This means that you charge purchases monthly, but pay the balance off at the end of every month. The worst thing you can do is refrain from every getting credit. A person with no credit history won’t ever be approved for a loan or mortgage because they are considered a high credit risk. You want to show creditors that you can handle loans responsibly by charging and making regular payments.
- Don’t hide credit skeletons in your financial closet – You might think that closing (paying off) a loan permanently removes any trace of your missed payments from your credit report. Wrong! Just because you close an account, doesn't mean your credit behavior with that account disappears. Think of your credit report as your financial report card with lenders. It included information on your payments – missed or paid - even long after you’ve closed the account. Financial secrets only hurt your credit score.
- Keep tabs on your credit report – Check out our article Credit Score Error to learn about how many people are affected by an error on their credit report unbeknownst to them. Credit bureaus put the onus on you as far as clearing up errors on your credit report. If you are disapproved for a loan and think it’s because of an error on your credit history, contact TransUnion, Experian or Equifax for a copy of your credit report (you are entitled to a free copy every 12 months).
- Don’t play the debt bait and switch – Simply pay the debt you owe on your loans and credit cards. The worst thing you can do is keep transferring debt from one credit card to another. You will likely incur transfer fees as a result and you can’t hide it from creditors anyhow – it all goes on your credit report.
- Don't open new credit accounts close to loan time – If you are planning to be pre-approved for a mortgage or loan the worse thing you can do is take out another loan or apply for a new credit card. Lenders are looking for a long and stable credit history, and opening a new account cuts into your credit history and shows the possibility that you may incur a large new debt. The best thing you can do before you apply for a loan is pay down existing debts to show you’re responsible with credit.
- Don't try to keep up with the Jones’ – You’ve head this saying. It means don’t try to live beyond your means. If you try to keep up with wealthier neighbors or friends you will only end up in debt. Credit purchases should be required purchases – for instance a new automobile to get to work – and after you’ve taken out credit you should be sure that you will be able to pay it back according to your credit agreement.
- Ask for help if you need it – If you find that you’re getting behind on payments contact the people who can help you - your lenders. Sometimes a heads up phone call will excuse a missed payment – it they know about it ahead of time. If you are in serious financial trouble seek the advice of a credit counselor. This won't improve your credit score right away, but it will put you on the right track to managing your credit responsibly, and show creditors that you are serious about paying back your existing debt.
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