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Worried About Your Credit Score?
Thanks to COVID-19 and its effects on the economy, many people have either struggled to maintain their credit or have seen their credit scores take a hit. As it is important to stay on top of this, there are things that you can do to keep it from getting worse or maybe even give it a boost. It is also important to remember that the situation many of us are facing is temporary, so stay positive.
What Is A Credit Score Anyway?
Your credit score assists lenders in determining whether you are a good risk for a mortgage, car loan, or credit card, and it also helps them to set the amount of credit they are willing to provide. Lenders want to make sure that you will be able to make your payments and not default on your loan(s).
According to myfico.com your credit report, which is maintained by the credit bureaus, Experian, Equifax, and TransUnion is used to calculate your FICO Score. A lender will approve or deny your loan application based on your FICO score. Your score can also play a role in the interest rate and length of the loan.
What’s in My FICO Score?
Your FICO Score is based on five factors; payment history, the amount owed, length of credit history, new credit, and credit mix. Your payment history and the amount owed are the largest factors in calculating your score. Payment history accounts for 35% while the amount owed is 30%. Length of credit history, new credit, and credit mix make up the remaining 35%.
So, what is credit mix you ask? A credit mix is a combination of different types of loans such as credit cards, student or auto loans, and mortgages. Your income, savings, and job security have no effect on your score. Lenders want to see that you are responsible when juggling more than one type of credit. A fair score range is 580-699, good is 670-739, very good is 740-799 and anything over 800 is considered exceptional.
Kudos to those of you with exceptional credit. Keep up the good work!
How Will It Help?
Having a good FICO Score can save you a great deal of money in your lifetime. The higher your score, the greater your chance of being approved for a loan when you need one and help you to get the best possible interest rate. Even a fractional percentage interest rate on a mortgage can save you thousands of dollars over the life of your loan. If your credit score is in a lower range, you may be required to come up with a larger down-payment when applying for certain types of mortgages.
What If I Don’t Have Any Credit?
If you don’t have credit right now, there are several things you can do. If you are a young adult, talk to your parents about adding you as a user on their account. The key point to remember here is that if your parents are not responsible for paying their bills on time, this option is a bad idea. On the other hand, if they pay their credit cards in full every month, this will be beneficial for you.
You can also apply for a credit card on your own. Request a small limit, let’s say $300 to $500, and pay it off every month. The trick is to make a small purchase each month and pay the full amount no later than the due date.
How To Improve Your Credit Score: 7 Helpful Strategies
1. Monitor Your Credit Reports
Register with an app such as Creditkarma.com or Credit Sesame to get your current score. Both apps also provide insight on how to best manage your credit and debt as well as identity theft monitoring.
You also have the capability to view your credit report and find out what is impacting your score. This will help you to take the necessary steps to either maintain your good credit or give your credit the boost it needs. You should report any errors on your credit report to the credit bureau.
One thing to note is that the score provided is the VantageScore and not your FICO Score. that is not to say you shouldn’t use Credit Karma or Credit Sesame, you just need to understand that it is not the same thing. The VantageScore provided is mainly used as an educational tool to help you understand how different factors can affect your credit. To see your FICO score, you can register with Experian. Experian also offers premium services such as credit lock and alert monitoring.
2. Pay Your Bills On Time
One of the biggest factors affecting your credit score is your payment history. Consistently paying your bills on time goes a long way when it comes to improving your credit score.
If you have trouble remembering to make payments, there are a few things you can do:
- Enroll in auto-pay either with any of your accounts that offer this option
- Set up automatic bill payments with your bank
- Set reminders in your electronic calendar
- Set up all your monthly bills with your credit card-you will only need to worry about paying one bill (just make sure to pay the full balance each month to avoid those hefty interest charges
3. Keep Requests for New Credit To A Minimum
Requesting credit or asking for an increase will reduce your credit score. If your FICO Score is on the low side and you are trying to give it a boost, refrain from opening any new accounts or asking for an increase to your credit limit.
4. Keep Open Credit Balance Ratio at 30% or Less
Even though your credit could take a hit for requesting an increase on your limit, if you can stick to your current spending habits, your score can easily be raised. This is because your ratio of open credit will decrease, and that is a good thing.
The ratio of open credit to balance, should not be above 30%. For example, if you have a $1,000 limit on your credit card, your balance should not be more than $300.
5. Do Not Close Old Accounts
You shouldn’t close existing credit card accounts. Your lengthy credit history will provide a better picture for credit bureaus. Consistently paying bills on time, and paying off debts such as a student loan, will help drive up your score.
See how Experian Boost can help you improve your score. The app gives your credit score a “boost” by connecting your bank and credit card accounts to obtain your payment history for all your bills including utilities. You can decide which accounts you want to link. Once your accounts are linked, your score will be automatically updated.
6. Consider Consolidating Your Debts
If your credit card bills are out of control or you are having trouble paying your bills, there are a few things you can do.
Call your credit card company and ask for an interest rate reduction. If you have been using the same card for a while, the credit card company may be willing to work with you to keep your business. They would rather see you pay your bills than default.
You could also look for credit card balance transfer offers. You will be able to transfer your current high-rate balance for a zero-percentage interest rate which will buy you some time and help you pay your other bills.
Asking for credit will reduce your score temporarily, but if you pay your bills on time, it won’t be long before your score goes back up. Make sure to read the fine print about balance transfers and annual membership fees.
Also, if you have money in a savings account right now, it is likely you are getting very little interest. This money would be better spent paying down your high-interest credit card debt. Once your credit card debt is more manageable, you will have the extra money to put back into savings.
You should also review your bank and credit card accounts to determine how you are spending your money. This will help you to decide where you may be able to cut back on your spending.
For help on stretching your budget, check out my post on “50 Worthwhile Tips to Easily Trim Your Budget”
7. Pay Credit Card Balances In Full Each Month
To bump up your score, pay your credit card balance in full by the due date. If you don’t want the credit bureaus to know what you have purchased during the statement period, pay the full balance before the statement closing date.
The statement closing date is different from the payment due date. The payment due date is the date your payment needs to be received by the credit card company to avoid late fees and interest. The statement closing date is the end of the period that includes all your activity for the period and determines the amount owed by the payment date. If you are unable to make an extra payment before the statement closing date, make sure to pay it no later than the due date.
FICO will soon be calculating your credit score a little differently. The new formula will take a closer look at your personal loan history which will now be separate from all other categories in your score calculation. FICO wants to understand why you needed that personal loan and be able to provide lenders with better information. Was it used to pay off high credit card balances? Do you still have the same credit card spending habits ON TOP of a new personal loan?
However, not all lenders will use the new calculations. If you apply for a mortgage, chances are the lender will use the older FICO score calculation. The bottom line, this new calculation will not affect every type of lending.
Summing It Up
Use the following strategies to improve your credit score:
- Monitor your credit reports
- Pay your bills on time
- Limit requests for new credit
- Keep old accounts open
- Consolidate your debts
- Pay credit card balances in full every month
So take charge of your credit now. There are so many benefits to understanding and increasing your credit score. The sooner you start, the sooner you will reap these benefits.
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