Your credit score (also called your FICO score) is the number assigned to you by credit rating agencies that indicates whether they consider you to be a good credit risk or a bad credit risk. This is vitally important in today’s credit heavy economy because it determines how much and what type of credit will be available to you. And perhaps even more important, what type of interest rates you will pay on the credit you receive. Contrary to what some folks believe, that credit score is not entirely out of your control. There are definite steps you can take that will improve it and ease your financial path going forward.
Simple and Effective Ways to Improve Your Credit Score
Take these simple tips to heart to improve your credit score and reap the benefits of good credit.
● Pay your bills on time – If your credit score is currently on the low side few things will bolster it in the long run like getting in the habit of paying all your monthly bills on time. That includes utilities because some credit reporting agencies factor utility bills into their final credit score determination. A great way to ensure your bills are always paid on time is to sign up for automatic online payments. More on that in a moment.
● Pay down your credit card balances – Credit rating agencies base your score in part on how much of your available credit you are actually using. This is called the ‘utilization rate’. The higher the utilization rate the lower your credit score. So, for instance, if you have a credit card with a $3,000 limit and you are using $2,700 that’s a 90% utilization rate. Not good. Try to bring the amount of available credit you are using under 30% of the available total.
● Keep an eye on your credit report – Most people aren’t aware that they are entitled to receive one free copy of their credit report per year from each of the major credit rating agencies. Take advantage of this in order to keep track of your credit score and to prevent bogus entries from making it onto your report. Such things happen and can have a negative impact on your credit score. So take advantage of these free reports to make sure your credit history is accurate.
● Don’t open any new credit accounts – It’s better to have just a couple of credit cards, make timely payments and keep your utilization rates low than to have a dozen cards. It might seem counterintuitive but it’s absolutely true: having more credit cards does not make you a better credit risk in the eyes of the credit agencies.
● Avoid making payments more than 30 days late – Sometimes life intervenes and throws us a curveball. As a result, it may not be possible to make a payment on time. What many people don’t know is that, unless the payment is more than 30 days late, many lenders won’t report it to a rating agency. All, however, will report a payment that’s 60 days late. So do your best to get the payment in before the 30-day window expires.
● Use automatic payments – Your payment history accounts for 35% of your overall credit score. So making sure your payments are made on time is vital to improving that score. The best way to do that is to set up automatic payments for your credit accounts. For that matter, you should set up automatic payments if possible for all your monthly bills.
● Create a rainy day fund – Saving money is always a good idea. A rainy day emergency fund is a great way to ensure you’ll never be caught off guard should life intervene and throw you one of the aforementioned curveballs. If you find yourself in a tough spot the rainy day fund can be used to make sure you cover all your monthly payments and your credit rating doesn’t suffer.
● Obtain a bad credit loan – Those wanting to rebuild a credit score that has taken a few hits should consider what are called ‘bad credit loans’. While these loans will typically come with a higher than average interest rate attached, they can nonetheless go a long way toward helping a person repair a damaged credit rating.
What’s the Formula Used to Calculate Your Credit Score?
One of the most frequent questions people have regarding their credit score has to do with how the rating agencies arrive at that score. What is the formula they use to determine if someone is or isn’t creditworthy? Let’s take a quick look at that calculus now.
Your credit score results from an analysis of 5 pieces of personal financial data. They are:
● Your payment history – This accounts for 35% of your total credit score.
● Your total debt – 30% of a person’s credit score is based on how much money they owe to various lenders.
● How much credit you have – About 10% of your credit score is based on how much credit you have. In most cases, more is not necessarily better.
● The length of your credit history – How long you have been using credit accounts for about 15% of your total credit score.
● The types of credit – Rating agencies look at the different types of credit a person has such as car loans, credit cards, personal loans and more. This accounts for about 10% of the final number.
Rebuilding your credit score is a task that will pay handsome dividends in the long run by:
● Lowering the interest rate on your credit cards
● Increasing your chances of raising your credit limits
● Enabling fast approval for car loans and mortgages
● Enabling you to obtain premium services like cable TV with no security deposits
● And more…
Does it Take a Long Time to Improve Your Credit Score?
How long it takes to turn your credit score around will depend on a number of factors. Certainly, the reason why your score took a hit to begin with will be important. For instance, if you had to file for bankruptcy it’s going to take a while for your credit score to recover. But don’t get discouraged. As we mentioned, rebuilding your credit score will pay off in the long run.