A credit score is a numeric summary of your credit history, a popular method for lenders to predict the likelihood that you will repay any loans they make for you.
Credit scores range from 300 (poor) to 850 (excellent). Higher scores illustrate constantly good credit histories, including on-time payments, low credit use and long credit score. Lower scores indicate borrowers may be risky investments because lately payments or overextended use of credit.
There are no exact cutoffs for good scores or bad scores, but there are guidelines for every. Most lenders view scores above 720 as ideal and scores below 630 as problematic.
Consumers are becoming more aware of how raising their credit rating enhances their financial outlook and Homonoff’s study has evidence of it. She found consumer behavior improved considerably when people were alert to their credit score.
“Many people thought they had a great score, but then found out they overestimated it,” she said. “They realized that they had to get started on changing credit behaviors, so they stopped making late payments, they paid cards with equilibrium and their scores improved.”
The FICO credit score is utilized by 90% of the firms in the U.S. to determine how much credit to give a consumer and what interest rate to charge them with the credit.
FICO uses five major components in the equation that produces your credit score. Those five include:
- Payment history (35% of score): Can you pay promptly? Do you pay the full balance, the minimum or somewhere in between?
- Amounts owed (30%): How much of the credit you’re allowed, would you use? If you exceed the limit, you have emerged as risky and penalized. If you use below 30% of credit allowed, you’re considered a safe borrower and get a positive rating.
- Length of credit history (15%): The longer you have a merchant account, the better the scorekeepers like it.
- Credit mix (10%): FICO likes to visit a mix between bank cards, mortgages and automobile financing … as long as you can afford them! Don’t take out another loan in hopes it will improve your score. This category doesn’t count enough in the overall equation.
- New credit (10%): It’s OK to occasionally open a fresh account, but if you are applying for several accounts in a brief period, you are a risk plus your score will reflect that.
As you go through life, your credit score will fluctuate. How much it fluctuates depends on how reliable you are in repaying debt on time, especially bank cards and installment loans. By using credit more often, whether it’s by firmly taking on more credit cards, getting a mortgage, taking out a student loan or auto loan, your credit score changes to reflect how you deal with the responsibility of more debt.
13 Tips to Increase Your Credit Score
If you are like many consumers and don’t know your credit history, there are several free places you can find it. The Discover Card is one of many credit card sources that provide free credit scores. Discover provides your FICO score, normally the one used by 90% of businesses that do lending. Almost every other credit cards like Capital One and Chase supply you with a Vantage Score, which is similar, although not identical. To get more information about how to raise your credit score click here
The Vantage Score comes from the same place that FICO gets its information – the three major credit scoring bureaus, Experian, TransUnion and Equifax – but it weighs elements differently and there could be a small difference in both scores.
Once you get your score, as Homonoff suggested, you may be surprised if it’s not as high as you expected. These are ways to enhance the score.
- Review Your Credit Report
You are entitled to one free credit file per annum from each of the three reporting agencies and requesting one has no influence on your credit score. Review each report closely. Dispute any errors that you find. This is actually the closest you can go to a quick credit fix.
A government study discovered that 26% of consumers have at least one potentially material error. Some are simple mistakes like a misspelled name, address, or accounts owned by someone else with the same name. Other errors are costlier, such as accounts that incorrectly are reported late or delinquent; debts listed twice; closed accounts that are reported as still open; accounts with an incorrect balance or borrowing limit.
Notifying the credit reporting agency of wrong or outdated information will improve your score as soon as the false information is removed. About 20% of consumers who identified mistakes saw their credit history increase.
- Set Up Payment Reminders
Write down payment deadlines for each bill in a planner or calendar and create reminders online. Consistently paying your bills promptly can raise your score in a few months.
- Pay More Than Once in a Billing Cycle
If you can afford it, pay down your bills every fourteen days rather than once per month. This lowers your credit utilization and improves your score.
- Contact Your Creditors
Do this immediately to set up a payment plan if you miss payment deadlines and can’t afford your regular debts. Quickly addressing your trouble can ease the negative aftereffect of late payments and high outstanding balances.
- Apply for New Credit Sparingly
Although it increases your total credit limit, it hurts your score if you apply for or open several new accounts very quickly.
- Don’t Close Unused Credit Card Accounts
The age of your credit score matters and an extended history is better. If you must close credit accounts, close newer ones.
- Be Careful Paying Off Old Debts
If a debt is “charged off” by the creditor, this means they do not expect further payments. If you make a payment on a charged off account, it reactivates the debt and lowers your credit score. This often happens when debt collectors are involved.
- Pay Down “Maxed Out” Cards First
If you use multiple credit cards and the total amount owed using one or more is near to the borrowing limit, pay that one off first to bring down your credit utilization rate.
- Diversify Your Accounts
Your credit mix – mortgage, auto loans, student loans and charge cards – counts for 10% of your credit history. Adding another factor to the present mix helps your score, so long as you make on-time payments.
- Quick Loan Shopping
If you have bad credit and can’t find every other way to improve your score, you could consider taking a “quick loan.” They are typically loans for small amounts – $250 to $1,000 – that get repayment history reported to credit reporting agencies, and may become a positive on your credit report. This is a last resort.
- See If You Qualify for a 0% Interest Card
Several companies offer cards with 0% interest on balances, but there are caveats to this. There might be a charge for transferring the balance and the 0%offer is merely good for an introductory period, typically 12-18 months. It often takes a very good credit score to qualify for one such.
- Consider a Debt Consolidation Plan
There could be a non permanent drop in your credit score if you sign up for a consolidation program, but as long as you make on-time payments, your credit score quickly increases and you are eliminating your debt that got you in trouble to start with.
- Pay Attention to Credit Utilization
Your credit utilization rate is the amount of revolving credit you’re using divided by the amount of revolving credit you have available. It accocunts for 30% of your credit history and is often the most overlooked method of improving your score. For many people, revolving credit just means credit cards, but it includes personal and home equity credit lines as well. The best credit usage rate never exceeds 30%. So, if you have a credit limit of $5,000, you must not use more than $1,500.