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Credit Rating How To Improve

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 16 minute read

If you’re like most people, you probably don’t give much thought to your credit score. You probably are aware that you need a high credit score to get approved for a loan or to receive the greatest interest rate on a credit card. As a result, you probably don’t give this figure much thought.

However, it should. The truth is that having a low credit score can have far-reaching consequences. There are a wide variety of industries, from insurance to potential employers, that use credit checks to gauge a person’s trustworthiness.

Your ability to rent an apartment, get a cell phone contract, or secure an affordable auto insurance policy can all be negatively impacted by a poor credit score.

Having a low credit score doesn’t have to be a lifelong setback. You may improve your credit score by cleaning up your credit report and applying for credit the right way. You can improve your score over time to the point where it actually helps you.

Workings of Credit Scores

Knowing how your credit score is determined is essential to learning how to improve it, especially in light of the numerous fallacies surrounding credit scores. 

You can expect your credit score to be determined by the following five factors:

  • A Record of Past Payments. The primary concern of any potential lender is whether or not they will be repaid for their loan. An improved credit score is a result of borrowing money and repaying it on time. Your credit score can drop if you make late or missed payments. Experian says that your payment history is worth 35% of your overall credit score.
  • Making use of one’s available credit. Lenders are less concerned if you owe money to other lenders. However, if you’re maxing up your credit cards and other lines of credit, it’s a warning indication that you’re already at risk of falling behind on your payments. Thirty percent of your credit score is based on your total outstanding debt, including credit card balances and installment loan obligations.
  • Duration of Credit Report. Extended credit history is a positive indicator for lending institutions. Those who have borrowed money and repaid it for a long period of time are likely to continue doing so. All of your accounts, as well as how long it’s been since you used them, play a role in your credit score. 15% of your credit score is based on how long you’ve been using credit.
  • Loan Compatibility. Lenders favor borrowers who have proven themselves capable of responsibly handling many loan kinds. Both open and closed loan accounts are used in the final credit score calculation. When added together, they account for around 10% of your final grade.
  • Renewals and New Credit Applications. Signs of financial desperation include applying for multiple loans at once. As a result, you will likely have problems repaying your debt. Your credit score takes a temporary hit if you apply for a new line of credit, such as a credit card or an installment loan. Ten percent of your credit score is based on how often you apply for new credit.

Credit scores are determined by a formula that takes into account all of the above indicators and is calculated by the firm known as FICO. The system will then give you a random number between 300 and 850.

You may get the cheapest interest rates on most loans if your credit score is at least 800. In contrast, if your credit score is below 580, you may have problems acquiring a loan of any kind.

How to Boost Your Credit Score

There is no simple solution to improving a low credit rating. Just as it takes time to get into terrible shape, so too does it take time to go back into excellent credit shape. But if you start using credit properly, your score will slowly but surely rise over time. If you need help fixing your credit, try these easy tips.

1. Review your credit report

The data in your credit report serves as the basis for your credit score. A credit report is a synopsis of your borrowing patterns compiled by one of the three major credit reporting agencies (Equifax, Experian, and TransUnion). You have access to three separate credit reports—one from each major bureau.

On the other hand, these businesses rely on data reported to them by lenders, and lenders aren’t always reliable. They can make mistakes, such as stating that you owe money for a loan that you paid off long ago. 

This kind of mistake can seriously lower your credit score.
Always keep an eye on your credit reports for any suspicious activity. One of the quickest ways to raise your credit score is to correct negative information that has been reported about you. 

The procedure is as follows:

  1. Purchase the Report Now! A yearly free credit report from each of the three major bureaus is your legal right in the United States. One place to get them is at AnnualCreditReport.com. Spreading them out throughout the year, obtaining one from a different bureau every four months, will allow you to maintain a close eye on your credit and quickly identify any discrepancies.
  2. Seek out the Errors. Verify that all of the accounts listed on your credit report are actually yours and that the amounts owed and the dates of any missed payments are accurate. Also, check for late payments and other bad issues that are older than seven years. When you check your credit record again after seven to ten years, you should see these negative marks disappear.
  3. Argue Against the Mistakes. You should report any discrepancies to the appropriate agency. The dispute forms can be submitted to any of the three bureaus via their respective websites. Another option is to formally request that the office correct the mistake by sending a letter explaining the situation and providing relevant facts about yourself. Please provide a copy of your credit report and any other evidence you have that substantiates your case.
  4. Attend to Outcomes. If you file a complaint with the agency, you should hear back from them within 30 days. In the event of an error, you will receive a complimentary copy of your report with the corrections applied. Not only will it notify the other two bureaus, but it will also notify the offending lender.
  5. Checking your credit score for free is another good approach to monitoring it. You can get your credit score and the data it was derived from through services like Credit Karma.

It’s a great method to keep an eye on your credit report throughout the year and spot any discrepancies quickly.

2. Pay bills promptly

The most important factor in determining your credit score is your history of making payments on time. Just a few days of late payments can have a devastating effect on your credit score. Furthermore, late payments have a compounding effect on credit scores.

There is no way to erase the damage done by past bill lateness. But if you get on top of your payments and keep on top of them, you can counteract that.

Your most recent actions will have a greater impact on your credit score, pushing the effects of past negative actions further down the list. Your credit rating will improve as long as you have a history of timely payments.

To avoid falling behind on payments, it can be helpful to set up payment reminders. There are a variety of financial institutions that provide this feature as part of their online banking services. The bank will send you an email or text message before each bill is due to help you remember to pay them.

It is also possible to set up an automatic bill payment plan that will handle the payment of your bill as soon as it arrives, without requiring any action on your part.

But these options don’t let you double-check your bill for errors before you pay it. What’s more, they don’t do anything to reduce your credit card amount by paying merely the minimum each month.

3. Reduce Debt

How much credit you use is second only to on-time payments in determining your credit score. Your credit usage ratio or credit utilization rate is the proportion of your available credit that you are actually using.

As an illustration, if your credit card has a $3,000 limit and you’ve charged $1,500 on it, your utilization rate is 50%. Credit reporting companies recommend a rate no greater than 30%.

The goal in the aforementioned scenario is to reduce the balance on the $3,000 credit card to $900 or less. To accomplish this, you would need to pay off $600 of the $1,500 debt. The higher your score becomes, the more of it you can pay off.

However, the overall amount of credit you use is simply one factor in determining your credit score. The number of accounts on which you have a balance is reflected in your MyFICO score, as well. One easy strategy to improve your credit score is to pay off a number of cards with relatively low balances ($100 here, $50 there).

Deal with the little ones first, then move on to the major ones. Reduce your spending and put aside a specific amount each month to put toward your credit card debt as part of your plan to pay it off.

Debt snowflaking is an option if you can’t afford to make a regular monthly payment. Don’t let even $10 in grocery savings go to waste; instead, put it toward your monthly debt payment.

Finally, try to bargain with your creditors if you have a high sum that you cannot pay off. In order to avoid complete loss of money in the event of bankruptcy, creditors may be willing to settle for less than they are owed.

Old debts that have been sent to collections can also be resolved using this method. You should get any deal put in writing. If, however, your creditors are unyielding, you may want to investigate a personal loan from SoFi. It can be used to consolidate debts at a more manageable interest rate.

4. Maintain Low Balance

Maintain a balance of no more than 30% of your total available credit. 

What follows are some suggestions for accomplishing this:

  • Cut your prices. Spending money on non-essentials will only drive up your credit card balance. The good news is that you don’t have to give up using credit cards altogether. Maintain a strict spending plan and avoid using your credit card for more than 30% of its limit.
  • Acknowledged and accepted. As soon as you receive your bill, send it in full. Having done so, your account balance will be reset to zero, and you can begin over with a fresh slate. Otherwise, you’ll merely keep accruing more debt on top of your existing liabilities. Additional interest payments have been added to your balance.
  • Put in your payment twice a month. It is not until the lender sends you a bill after you have paid that they typically report your payment history to credit agencies. Even if you immediately repay the $1,000 you charged, it will appear as though your credit card is at its limit of $1,000. Subdivide the $1,000 due into two $500 payments and send the first one two weeks early to avoid the hassle. Your total charge will never go above $500 in this scenario.
  • The Credit Limits Should Be Increased. You can reduce your credit utilization ratio in two ways. If you want to pay off your bill or increase your available credit, you can do either. Having a balance of $1,000 on a credit card with a new limit of $3,000 means you’re only using 33% of your available credit. Of course, this strategy is only effective if you refrain from making any purchases with your improved credit score.

5. Register in Experian Boost.

Experian Boost is a service provided by Experian, one of the three major credit reporting companies. With a credit line for your cell phone and utility bills, you can raise your credit score.

At registration, you’ll be asked to link the payment account you’ll be using to make purchases. After that, you can pick and choose the payments that count toward improving your payment history, and verify that you actually made them.

Since your payment history accounts for 35 percent of your credit score, using Experian Boost is a quick way to raise that portion of your score.

6. Keep open old accounts.

Old debts may be a black mark on your credit score in the eyes of some. After paying off a credit card balance, they immediately terminate the account. They contact the credit reporting companies in an effort to have a paid-off auto loan removed from their reports.

Everything about this is backward. Your credit score will benefit from any debts that you have paid off on time. And the longer the positive debts remain on your credit report, the better. Actually, even if you never use it again, it may be wise to leave an inactive credit card account open.

One benefit is an increase in your total amount of credit. Your credit usage rate will remain low because of all that available credit that you’re not using. Having a greater credit card limit is beneficial to your score.

Two, having an older card in good standing can enhance your credit score. One of the most important factors in determining your credit score is the age of your oldest open account.

Don’t cancel that old card — it will lower your credit score and decrease your credit history. If you’ve had the card for a long time, even if you haven’t used it recently, it’s still worth keeping.

7. Examine a credit-building loan.

You can raise your credit score by borrowing money and promptly repaying the lender. The difficulty is that financial institutions are hesitant to extend credit to those with weak credit ratings.

Unfortunately, this results in a Catch-22 situation in which establishing or enhancing one’s credit standing is impossible in the absence of the other. Credit repair loans are an excellent solution to this issue. 

The borrowed funds are not made immediately available to the borrower in this particular lending arrangement. Instead, the lender deposits it into his own bank account. After that, you make payments on a monthly basis for a predetermined time frame often between six and twenty-four months. 

Lenders release funds from an escrow account once they have received full payment. The lender takes no risk while offering a credit-building loan. It has the right to demand repayment at any time if you default on your payments.

It’s a great strategy to save money and establish credit for the borrower. One possible use for the funds you borrow is to establish a small savings account, begin a college fund for a child, or purchase a vehicle.

The downside is that not all financial institutions offer credit-building loans. If no financial institution near you provides this service, you can always look to national providers like Self.

You should verify with the three major credit agencies that the lender plans to record your on-time payments before accepting any loans from them. That is, after all, the idea behind this loan.

8. Avoid taking out further loans

Your credit report is checked each time you apply for a loan, no matter what form of loan it is. Because applying for new credit can be seen as an indication that you are low on cash, this inquiry will cause a tiny drop in your credit score.

This is a feature exclusive to hard inquiries, or inquiries made by lenders. Checking and requesting your own credit report has no negative effect on your score. Most credit hits are rather minimal. 

One hard inquiry often has less of an impact on your credit score than five points, as reported by MyFICO. Further, only inquiries made within the past 12 months have an effect on your score, so even a temporary reduction like this is quickly recovered from.

On the other hand, things change if you apply for numerous new loans all at once. Excessive credit applications send a negative signal to lenders and lower your score.

The good news is that this is only the case if you apply for many loans simultaneously. It’s not a big deal if all you need is a better interest rate on a single loan.

Hard credit queries for mortgages, cars, and education loans made within the past 30 days are not factored into your credit score. As a result, rate shopping won’t affect your loan in any way, even if you’ve made multiple queries in the last month.

It’s important to note that credit bureaus evaluate these loan applications differently, even if the inquiry is older than 30 days.

Multiple inquiries within a short time frame of 45 days, as per the most recent FICO scoring methodology are aggregated into a single score. One loan application will affect your credit score once as long as you don’t apply for any further loans at the same time.

Frequent borrowing can affect you in other ways as well. While it’s beneficial to keep existing accounts open, opening too many new ones can have the opposite effect.

To keep your credit profile looking fresh, open a couple of new cards per year. Keeping your accounts to a minimum and maintaining them for longer periods of time allows your credit report to age, which is beneficial to your score.

A good rule of thumb is to wait at least six months before applying for new credit if you’re planning to take out a large loan, like a mortgage, in the near future. A temporary reduction in your credit score could cause you to miss out on lower interest rates, so you want to avoid that at all costs.

Your good credit score of 670, for example, might dip to the fair territory of 665 points with just one credit inquiry. You risk getting a higher interest rate on your loan or having your application totally dismissed.

9. Think about Credit Counseling

You can demonstrate your fiscal fitness by implementing the aforementioned steps. You can avoid giving the idea that you are financially troubled when you are not by fixing mistakes, paying down your balance, retaining previous accounts, and not opening any new ones.

But suppose you actually are suffering financial difficulties. Is there any way to get out of this hole you’ve dug without severely damaging your credit?

Going to a credit counseling service might be your best bet. With the assistance of these services, you can organize your debt payments so that they are more manageable. They may also be able to negotiate with your creditors to reduce the amount of interest and penalties you must pay.

Credit repair services like those offered by credit counselors don’t work instantly. But when you make payments and shrink your debt load, your credit score will rise. Additionally, consulting a credit counselor won’t have any immediate negative effects on your credit score.

Though, caution is advised. Many credit counselors are legitimate and may actually help you, but there are also many scam artists out there who will take advantage of your desperation to make a quick buck. Through the U.S. Trustee Program of the Department of Justice, you can locate a credible credit counselor in your state.

10. Watch Out for Scams

You have no doubt come across advertisements for services that claim they can repair a low credit score. Many companies say they can erase credit problems, remove negative items from your report, or even create a new credit history from scratch.

Claims like this are obviously false. Some credit repair businesses are trustworthy, but those who claim they will magically fix your credit for you are not to be trusted.

Stay away from any service that:

  • Guarantees a speedy solution. There are businesses that claim they can erase negative items like missed payments, liens, and bankruptcies from your credit report. You can’t believe this because it’s a lie. While it is possible to have errors corrected in your credit report, erasing your credit history entirely is not possible under the law. There’s nothing you can do but wait for the negative grades to disappear on their own.
  • Not willing to commit to paper. A credit repair company is required by law to provide you with a written contract that details the services they will provide, how long they will take, and how much they will cost. It also has to tell you the steps you may take to fix your credit on your own without breaking any laws. The provider must also allow you to cancel for free within the first three days. In my opinion, any service that doesn’t include all of these features is a fraud.
  • Wants to Get Paid Right Away. A credit repair agency has the right to request money only once they have successfully rectified your credit report. You should be wary of any business that demands payment upfront before providing any sort of assistance.
  • Gives you a chance to start over with a fresh persona. A new credit profile number, or CPN, may be issued by a company in place of a customer’s Social Security number as part of a credit repair service (SSN). Sometimes it is a stolen Social Security number, while other times it is a fake. This is a serious crime called identity theft, which might send you to jail.
  • Provides you with an Employer Identification Number (EIN). Some businesses will not provide a CPN but will instead recommend that you file for an EIN from the IRS and use that number when applying for credit. Even though Employer Identification Numbers (EINs) are actual numbers that can be used by businesses, it is illegal to apply for one for personal use.
  • Instructs You to Lie. You might not even get a phony ID at some companies. They simply recommend making false statements or using a false Social Security number when applying for new credit. These methods are also forbidden by law and may result in legal repercussions such as a monetary fine or even jail time. 

The truth is that there is nothing a service can do to repair your credit that you couldn’t do yourself. However, you can do the same things on your own, such as dispute errors on your credit report or negotiate with lenders. Paying for a service to take care of them can be convenient, but it won’t solve all your problems.

Bottom Line

A lot of individuals feel it’s not fair that potential employers look at your credit report. After all, there’s only one thing that can be deduced from your credit score, and that’s how well you handle debt repayment. Avoiding debt entirely will result in a lower score, but that doesn’t make you reckless.

Some people are attempting to alter the current structure. For instance, Consumers Union is pressing state insurance commissioners to ban the use of credit scores in setting premiums via an online petition.

For the time being though, your credit score is going to have an enormous effect on your life, for better or worse. It’s rational to try to increase one’s credit score by whatever means possible.

Actions like paying down debt and opening a savings account are good for your score and your finances in general. Most of them won’t help, but they won’t hurt either.

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