How to Improve Your Credit Score
Many consumers have some basic knowledge of credit scores and how they work. When you apply for new credit, such as a car loan or a new credit card account, the creditor reviews your FICO® credit rating to determine if you are credit worthy. Your score often plays a role in the interest rate and terms that you receive. You may be aware that a higher credit rating is viewed as positive, and a lower credit rating viewing as negative. For many consumers, this is where knowledge about credit ratings ends.
What is a FICO® Score?
FICO® is a term that is commonly associated with credit scores. It refers to the Fair Isaac Co., which is most commonly known as FICO® for simplicity. FICO® analyzes the information that it obtains about your credit history from each of the three credit reporting bureaus, which are Experian, Equifax and TransUnion. Because each bureau may collect different information about you from various sources, the scores rarely match across the board.
This company then uses a process that is known as predictive analytics to determine how likely you are to pay on your accounts as agreed or to default. The end result of the analytical process is your credit score. While many lenders and others review your scores, they also take a more detailed look at the factors that may be driving your credit rating lower.
If you have recently learned that your credit score is lower than you would like it to be, such as if you have been denied credit, you may be wondering what steps you can take to raise the score. FICO® analyzes numerous factors to determine your credit score. This means that a positive adjustment to any of these factors could potentially improve your credit score. Likewise, a negative adjustment could lower your credit score. These are some of the proactive steps that you can take to raise your FICO® score.
Make Payments on Time
One of the seemingly easiest steps that you can take to increase your credit rating over time is to make your payments before the due date. Even a single late payment can remain on your credit rating for up to seven years, bringing down your rating for this period of time. Keep in mind that the FICO® score takes into account how long it has been since your last late payment. This means that you do not have to wait for seven years for late payments to drop off before you see an improvement in your score. The longer that it has been since you made a late payment, the better your credit rating may be.
Reduce Debt Balances
FICO® scores also take into account your total debt balance and the type of debt that you are carrying. For example, if your credit cards are maxed out, your credit score may be lower. Generally, it is best to pay revolving credit accounts off in full each month. If you must carry a balance on your credit cards, try to keep the balance below 50 percent of the total credit line. Over time, gradually reduce all debt balances.
Avoid Opening New Accounts
One of the factors that affect credit scores that many consumers are unaware of is the number of open credit accounts that you have. This means that having two credit cards is preferable to having five credit cards. If you want to increase your credit rating, make use of the accounts that are currently open, and avoid opening new accounts. The length of time that your account has been open also affects credit ratings. Therefore, keeping one credit card for five or ten years is more advantageous than having one credit card that you have only had for a few months. Likewise, if you have recently applied for a mortgage loan, car loan or other fixed term loan, your credit score may decrease for a short period of time while you establish payment history on the new account.
Become an Authorized User
A fast way to boost your credit rating is to become an authorized user on someone else’s credit card. As an authorized user, you receive the entire credit history of that account as your own. This only works in your favor if the account that you are authorized to use has a great payment history. It also is advantageous if the account has been open for a lengthy period of time and has a low outstanding balance. Remember that this person’s payment history and use of credit can impact your credit score in positive as well as negative ways. Only become on authorized user on an account if you are certain that the other person is very financially responsible.
Pay Off Judgments and Collections Accounts
Your FICO® score reflects any judgments and collections accounts in your name. These types of accounts will remain on your credit report for at least seven years, and there is nothing that you can do to remove them. However, it is helpful to pay off any balances tied to them. For example, if you have a civil judgment of $100 for a contractor’s bill that you failed to pay, paying the balance off can result in a positive bump to your credit rating.
Some consumers have errors on their credit report that are dragging their scores down. For example, someone else’s account may be listed on your report because of a mix up with a Social Security number. Perhaps a late payment is being reported in error. You are entitled to receive one free credit report from each of the three primary reporting bureaus each year. The information on these credit reports can vary. Therefore, obtain all three reports annually. Ensure that the information is correct. If you notice an error, follow the steps to correct the error. Remember that the process of correcting information on a credit report may take several months.
Some people expect instant results when they take these steps to improve their credit rating. Each of these steps can affect your credit rating in a positive way, but you generally should not expect an immediate boost in your credit rating. For the steps that may result in a more significant increase in your credit rating, such as correcting reporting errors, it may take several months for the information to be updated and for your credit report to reflect the new information. If you are paying down account balances or waiting for your credit accounts to become more established to boost your credit rating, be aware that you may see a very gradual increase in your credit scores over many months or years. Remember that your credit report is a reflection of your last seven years of payment and credit history. It is not possible to erase your financial management history from five years or six years ago. You simply must let time pass so that your new and improved financial management efforts replace the history that drops off of your credit report naturally with time.
Your credit scores can affect everything from your ability to qualify for a new credit card or loan to your ability to rent an apartment, get a low rate on insurance or even obtain a new job. You understandably want your credit score to be as high as possible. Understanding how to improve your FICO® score is essential, but you also need to take proactive steps.
It can be difficult to follow through on some of the methods if you do not have savvy financial management practices. Decreasing your reliance on borrowed money is an important step to take to accomplish your goals. You can fund an emergency savings account so that you do not turn to credit cards when unexpected expenses arise. You can also scale back your lifestyle so that you live far beneath your means. Through these various steps, you may eventually be able to achieve a higher FICO® score.