Whether you're trying to rebuild your credit after making some poor financial decisions or you're getting ready to apply for a new loan or mortgage and want to make sure you get the best interest rate, it's a smart move to take steps to raise your credit score. This is true whether you're trying to rebuild your credit after making poor financial decisions or you're getting ready to apply for a new loan or mortgage. In this article, we will discuss the factors that have an impact on your credit score, as well as seven strategies for improving it, as well as considerations to make if you are considering working with a credit repair company.
What's the deal with having a high credit rating?
A better credit score can mean a significant reduction in the amount of interest you pay over the life of various loans, credit cards, and mortgages. If your credit is good to excellent, you can expect to pay less in interest over the life of any loan you take out, whether it's a home mortgage, car loan, or personal loan.
For instance, a New York resident with a credit score of 590-619 would pay $4,885 in interest over the life of a $20,000, 48-month loan on a used car, while a resident with a credit score of 720-850 would pay only $1,617 in interest. A total of $3,268 is spared.
What is an acceptable credit rating?
The range of possible values for your FICO Score, a credit scoring model commonly used by lenders to determine whether or not to grant credit, is 300 to 850. There are five credit bands within that range.
A good FICO score is between 670 and 739, and an excellent score is above 740.
The three major consumer credit bureaus, Experian, Equifax, and TransUnion, compile the data used to determine your FICO Score. However, it's important to remember that credit bureaus don't actually generate your FICO score. Further, under federal law, you are entitled to one free copy of your credit report annually from each bureau, which you can request at annualcreditreport.com.
Credit bureaus have been providing free weekly reports during the coronavirus pandemic.
Boosting Your Credit Score: 7 Steps to Take
You can influence your FICO Score (the scoring model most frequently used by lenders) by the following:
1.The first step is to look for mistakes on your credit reports.
It's a good idea to periodically check your credit reports for errors by visiting annualcreditreport.com. If you see a bank account that you didn't create, for instance, it's possible that your personal data was stolen and used fraudulently, or that someone else's data got mixed in with yours. If this happens, you can file a dispute to have the account deleted.
Assuming the error is present across all three of your credit reports, you should file a dispute with each of the credit reporting agencies. Information on how to file a dispute with each credit reporting agency, including links, phone numbers, and postal addresses, is available on the Consumer Financial Protection Bureau's (CFPB) website.
Your credit reporting agency has 30 days to look into your dispute after you've submitted it to them.
It's important to remember that you can only challenge false claims. You have no right to dispute a negative item on your credit reports if it is a true reflection of your behaviour.
2. Reduce any outstanding balances on your credit cards.
Reducing revolving debt (credit cards, lines of credit, etc.) is a quick way to improve credit.
The utilisation ratio this creates can have an effect on the "amounts owed" part of your FICO score. Simply put, a high utilisation ratio indicates that you are not making good use of your available credit. In this case, a credit card with a $1,000 limit and a $500 balance would be considered 50% utilised.
The recommended limit for credit card debt is 30%, or $300 of a total credit limit of $1,000. It's important to keep in mind that utilisation is computed both per-account and aggregated across all of your accounts.
Finally, let's define revolving credit. Loans secured by a person's property or their income are two other common forms of revolving credit (HELOCs). Using a revolving line of credit, you can take out money when you need it and pay it back as you go. Installment credit, on the other hand, refers to loans where the loan amount and repayment date are both determined in advance. Any credit you pay off in installments will not count towards your credit utilisation ratio.
You should try to keep your credit card balances low and pay them off on a regular basis. Around the end of the statement period, or about three weeks before the bill is due, these balances are often reported to the credit bureaus. Therefore, high utilisation can have a negative effect on your score even if you pay your bill in full every month.
Finally, using a personal loan to pay off credit card debt is an option to consider if you're having trouble getting a high balance under control. A hard inquiry from the application process will temporarily lower your credit score; however, as you pay down your revolving debt with the loan's proceeds, your score should rise.
3. If you don't already have a credit card, you should apply for one.
To establish credit, a credit card is not required. But if used wisely, a credit card is a potent tool for boosting your credit score, whether it's already in good shape and you're looking to take it to new heights or you need to rebuild credit after making some mistakes.
Most card issuers, but not all, report account and payment activity to all three consumer credit bureaus, so keep that in mind when shopping for a new card. There is a missed opportunity if you are using a credit card that only reports to one or two credit bureaus.
A secured credit card may be an option if your credit is less than stellar. Secured credit cards require you to put up collateral, usually a deposit, with the issuer equal to the amount of the credit limit you want. However, aside from the security deposit, a secured credit card operates similarly to any other credit card and can even help build credit.
And if your credit is good to excellent, you have choices. Credit cards that offer cash back rewards and those with introductory periods of zero percent interest can be helpful whether you need to make a large purchase or consolidate high-interest debt from another card.
4. Think about signing up for Experian Boost.
Experian's free service lets you raise your credit rating by making on-time payments for things like your phone bill, utilities, and select streaming services that wouldn't normally be taken into account.
According to Experian, the average increase in credit score after using Experian Boost is 13 points (using the FICO Score 8 model). Although this service will only improve your credit score for lenders who check with Experian, it may be worthwhile for consumers with little or no credit history to sign up.
Five, be patient as negative information on your credit reports expires.
The desire to swiftly raise one's credit score is understandable, but some things simply take time. Numerous unfavourable items can remain on credit reports for seven years or more. However, negative items will be removed from credit reports over time. Timelines for the expungement of various forms of blemishes are as follows:
- Bankruptcy under Chapter 7: 10 years
- 7 years after filing Chapter 13 bankruptcy
- Seven-year billing cycle
- Seven years of payment delays
- For in-depth investigations, plan on spending at least 2 years.
6. Apply for new credit infrequently, if at all.
If you're looking to improve your credit score, applying for a new credit card may be a good idea. However, applying for too many different types of credit at once can have the opposite effect. In a number of ways, applications can make things worse for you:
inciting serious investigation. A "hard inquiry" occurs when you apply for credit, and the lender accesses one or more of your credit reports to determine your creditworthiness. Credit scores can drop anywhere from 5–10 points after a hard inquiry, and the negative impact can last for up to two years (though the negative impact ceases after one year).
By decreasing your typical account age, you can improve your financial situation. The average age of all your accounts contributes to the 15% of your FICO Score that is devoted to the length of your credit history. In particular if you are just starting to establish credit and don't have many other accounts to balance things out, opening new accounts will lower your average account age.
showing your desperation by your actions. Lenders are more likely to reject your applications if they notice a high volume of recent inquiries on your credit reports, which may indicate that you are desperate for credit and unlikely to repay what you borrow.
7. Do not be late with any payments:
Since 35 percent of your FICO Score is based on your payment history, timely payments are crucial.
If you find it difficult to keep track of when bills are due, autopay can be set up with your credit card company or your bank. Some services even allow you to schedule email or SMS alerts to remind you of upcoming deadlines.
A budgeting website or mobile app can also be useful, especially if you use multiple credit cards, as you will be able to keep track of when purchases are made.
The good news is that creditors typically won't report late payments to the credit bureaus until they're at least 30 days overdue. However, a late fee and a higher penalty interest rate may still apply, so it's best to avoid being even slightly late whenever possible.
To what extent would it be wise to hire a credit repair agency?
There is no magic bullet for improving your credit score, and any credit repair service that promises instant results is probably trying to trick you. The Federal Trade Commission (FTC) has even set up a website specifically for the purpose of warning consumers about credit repair scams.
Rather than paying a credit repair company, there are legitimate things you can do on your own.
Get started on our course right away, and once you've mastered everything, you can take the exam and receive your certification in as little as a week. You don't have to pay anyone to get your credit straightened out.
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