Credit is a promise to pay in the future in order to borrow money in the present. The higher your credit score, the better chance you have to get approved for a bigger loan. The credit report is a record of your credit activities.
Bad credit can lead to a lot of problems. Do you want to qualify for a job that handles money? Want to buy a new house? Want a better rate for your loan? Those things and more will get your credit checked. You even have to come up with more deposit when you rent an apartment if you have a low credit score.
A credit score is a numerical score used by banks or loan companies to determine your creditworthiness. It determines the risk you pose to a creditor and illustrate the likelihood that they will recover the amount owed. So it is very important to ensure your score is as high as possible. Your credit scores range from 300 to 850.
To get a better understanding of credit score:
When your credit score is in the range of 720-800, you can enjoy lower interest rate on your loans or credit cards. On the other hand, credit score in the range of 500-620 is lower than satisfactory; you will have to pay much higher interest fees or security deposit amount. Credit scores at or below 500 is considered poor credit rating; you’ll need to start building your credit score.
9 Things That Can Ruin Your Credit
What Determines Credit Score?
The Fico score is the most commonly used scoring model, which is calculated of the following five factors:
20 Tips to Improve Your Credit Score
There are certain things you can do in order to raise your score. Below, you’ll learn how to improve your credit score.
1. Request a copy of your credit report from all three credit reporting agencies: Equifax, TransUnion, and Experian. Inaccuracies occur often in these reports. The Fair Credit Reporting Act (FCRA) allows consumers to request a free copy of their credit report once every 12 months from the three agencies. Check your credit report at least once a year to see your credit score and any mistakes. Visit www.annualcreditreport.com to order your free credit reports.
2. Learn how to check your credit reports and scores for errors and discrepancies. Your scores might vary from one report to the next. It happens if your lender doesn’t report to one or more of the agencies or one of your reports contains errors.
3. Credit reporting agencies rely on the information that creditors send to them and sometimes the information is incorrect. Look at each of the 3 reports and compare them. Check to make sure your name and address are correct. Check for any incorrect information, including your balance on your cards.
If you notice any error, contact the credit reporting company in writing for incorrect information. You’ll need to make copies of your credit report, highlight the incorrect information, along with the copies of supporting documents such as statements.
Explain the erroneous information and request that the information be removed or corrected. The reporting agencies will usually take about 30 days to investigate your dispute. Make sure to keep a copy of all documents.
4. If you have any bills that are unpaid, try to pay the past due amount right away even if the account is closed in order to get rid of delinquent listing on your credit report.
Try to remove the delinquent listing and any other errors on your credit report. Contact both the credit reporting agency and the creditor listing the account. Removing errors from a credit report is a slow process.
5. In case you lost your job, had medical bills you couldn’t pay, or whatever happened that made you unable to keep up with the bills, to explain your circumstance as why you couldn’t pay on time.
6. Pay all your bills on time. Payment history contributes 35% of your credit score so you need to take it seriously. If you cannot pay the full balance on time, try to pay the minimum payment. Avoid late or missed payments. The only sure way of raising your credit score is to continue to pay your bills on time.
A late payment can affect your score within two months, while making payments on time can take over six months and up to a year to improve your credit rating. A single late payment on a credit account could lower your score from 50 to 100 points.
Missing a mortgage or auto loan payment will damage your credit more than skipping a credit card payment because they carry more weight in the credit score. You should try to pay bills on time, including your utility bills. Unpaid bills may be sold to a collection agency, which will damage your credit.
7. One of the items your score considers is how many of your cards carry balances, so it’s best to select one or two cards that you can use for everything.
Start by paying your balance with the highest interest rates so that you will pay less in the long run. In addition, try to pay off small debts on your accounts to boost your score. If you cannot afford to pay your balance in full, transfer your balance to a credit card with a lower interest rate.
8. High utilization ratio on your credit card will result in a lower score. So you need to improve your debt-to-credit ratio; that is how much credit you have available in comparison to the amount of debt you owe. If you don’t have access to a lot of credit, ask for a credit increase on your card, so that you maintain low balances relative to the card’s limit. Your goal should be to have around 30% of the credit limit on each card.
If you are paying balances in full every month, your credit rating still considers your monthly balances. To boost your score, keep your balances low. Never max out credit lines. Try to never use more than 30% of your available credit. The higher credit ceiling in comparison to your debt, the better for your credit score.
9. Too many open accounts and excessive line of credit will lower your score. That makes lenders wonder why you need all that credit. Excessive large credit line tends to be used and is a potential risk for future creditors.
10. Avoid opening too many accounts at once and don’t open any credit lines you probably won’t use. Instead, try to increase your credit limit on cards you already have.
Every time you apply for a new credit or a loan, they run a credit check. As a result, an inquiry is placed on your credit report. Too many inquiries will lower your credit score, especially if you apply for a several different sources of credit within a six month period.
11. If you have a low credit score it could be that you have never taken out any credit. You should use your card regularly to extend the length of your payment history and to increase your credit score. If you don’t use your credit card for a year, the card issuer may close your account.
12. Try to have 2-3 credit cards and use it to keep it active. Pay your bills on time. However, avoid cash advances due to cash advance fees and high interest rates.
Apply for credit cards that have cash-back rewards and no annual fees. Rather than applying for department store credit cards, try to use credit cards issued by banks.
13. Try to take out a small personal loan and repay over a year. However, avoid borrowing from private institution because it lowers your score.
14. While it may be good for your finances to pay off a loan, it doesn’t help your credit score. An open account shows you are handling credit wisely. Debt that you’re handling well is good for your credit. The longer your history of good debt that’s paid on time, the better it is for your credit score.
15. Don’t suddenly close most of your credit card account. It is better to just not use them as often. Closing these cards shortens your credit report and your credit history; it will leave you with a smaller amount of available credit and makes you seem less credit-worthy. So try to keep credit cards that have no annual fees open for as long as possible and use it to boost your credit score.
16. Avoid bankruptcy unless you don’t have any other option. Declaring bankruptcy can damage your credit score for a long time. It will remain on your credit report from 7-10 years.
17. Try to pay any bill that has been charged off or sent to collections and are less than 24 months old in order to raise your score. Paying any charge off that is older than 24 months old won’t help your credit score.
18. If you have negative items, such as bankruptcy, judgement, or foreclosure, beware of credit-repair scams. You should avoid them due to misleading, fraudulent, and number of reported scams.
19. Continue to monitor your score for at least once a year. Look for invalid charges, inaccuracies, and compare the 3 credit reports from major credit bureaus.
20. Open a savings account to ensure that a fund is in place for the emergencies rather than maxing out your credit cards that can lower your credit score.
By William Robinson – 2019
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