That three-digit number called a credit score can have a big impact when it comes to purchasing a home, driving away in a new car and even opening up a new credit card.
“We have seen data recently that people have relatively a clear understanding of the factors that determine their credit score,” says Bruce McClary, spokesperson for the National Foundation for Credit Counseling™ (NFCC). “That’s good. But going beyond that, there are a number of people entirely unclear about what their score can do for them in terms of qualifying for a loan.”
Having a lower score costs you more to borrow. Plus, it carries over in other areas. IF the cost if higher, you don’t have as much incentive to borrow as often as you like.
So, use the cash you have instead of borrowing for the things you want. First thing on your mind should be doing the things that boost your credit score and graduate you from
“It can be a long process from the bottom to the top of the ladder,” McClary says. “But it is worth the effort.”
First things to do to raise credit score is to actually get your credit report. The most widely used credit scores by lenders are FICO® Scores. The NFCC suggests a prime mortgage generally has a fixed or adjustable interest rate, but a subprime loan is almost always an adjustable-rate mortgage. This means that interest rates on subprime mortgages can go up a lot over time and cost you more than you expect in interest, according to the Consumer Financial Protection Bureau.
The first thing you should do before changing any of your habits is visit AnnualCreditReport.com to get your free credit report from each of the three major reporting agencies: Equifax, Experian and TransUnion. You are entitled by law for a free copy from each one every 12 months. You can stagger them or get them all three at one time. Make sure there are no late payments listed that weren’t of your own doing. Plus, check the amounts owed for each account are right.
If you find errors, dispute them yourself. If it looks like someone has stolen your identity and that’s why there are mistakes on it, go to identitytheft.gov to get the steps it will take to help you recover.
What is a good credit score?
When talking about a FICO score, the range is 300-850, McClary adds.
“The lower the score, the worse your credit is. The higher the score, the healthier your credit is,” he says. “A 760 or higher is generally accepted, and it will make it more likely to be approved for a loan and qualify for some of the better terms.”
What is a bad credit score?
McClary says that anything in the low 600s or below that is below average credit score. If you are in the 400s or 500s, you will more likely have to deal with subprime lenders, which means much higher interest rates when it comes to getting a loan. A prime mortgage generally has a fixed or adjustable interest rate, but a subprime loan is almost always an adjustable-rate mortgage. This means that interest rates on subprime mortgages can go up a lot over time and cost you more than you expect in interest, according to the Consumer Financial Protection Bureau.
Here are some ways to truly increase your credit score:
Setup reminders or automatic withdrawals
myFICO, a subsidiary of FICO, says to setup payment reminders with your bank, or just make it easier have your credit card and other revolving credit come out of your accounts automatically every month. Being on time and not late with payments is very import. Your account history contributes 35 percent to your FICO score calculation, McClary says.
“If you miss one payment it can drop your score 100 to 300 points. The stakes are very high on making your payments on time,” he adds.
Keep revolving credit under control
Keeping the balances low on your credit cards is very important. In fact, this category of amounts owed contributes 30 percent for a FICO score calculation. You need financial discipline to clean up this area. You should be starting to pay off debt rather than moving it around, myFICO says. In fact, owing the same amount but having fewer open accounts may lower your scores.
Do not close unused credit cards as a short-term strategy to raise your scores. Plus, don’t open a number of new credit cards just to increase your available credit. Having those extra credit cards may just entice you to buy more.
“Tackle balances on our cards with the highest utilization first,” McClary says.
Use work bonuses, tax returns, birthday money or whatever extra money you get to start to make bigger payments. For instance, a $500 payment on a $1,000 limit card can make a huge difference.
Get a personal loan to consolidate your credit cards
Credit cards can have very high interest rates. Taking out a personal loan with much smaller interest rate and paying off those cards and other debt will definitely help your credit score.
Should you use credit counseling companies?
“There is no magic bullet to raise your credit score,” McClary says. “And there are a lot of companies out there that promise quick results. Go with extreme caution. Be very suspicious about the offers being made. It takes time. If you really apply yourself and commit to making payments on time and limiting your borrowing activity, you can see a difference in your credit score in six to 12 months.
That could be enough of a difference to put you into a category where you might be able to borrow easier and with much better
“The more time you put into yourself and your situation, the more likely your credit score will move back,” he adds.