What is a credit score? You’ve probably seen the term floating around social media or in your friends’ financial advice. Do you know how much it matters and how you can increase your score? If not, you might be surprised to learn that having a low credit score can seriously impact your financial future. Higher scores can help you qualify for loan offers with better terms and lower interest rates, while lower scores mean higher interest rates and limited loan options. Fortunately, there are plenty of ways to increase your credit score, from paying attention to detail on your accounts to maintaining good credit habits over time. Keep reading to learn more about what affects your credit score and how you can start working toward increasing it today!
How Does a Credit Score Work?
Credit scores give lenders an idea of a particular person’s likely ability to repay a loan. Your credit score is a number between 300 and 850 that shows how likely you are to repay a loan. A credit bureau such as Equifax or TransUnion will look at your payment history and activity on your accounts to come up with a number between 300 and 850. Your credit score will also be affected by how much debt you have, how much of that you have on credit cards and how much you owe. The type of account you have also matters. A creditworthy person with an installment loan will have a better credit score than a person with a credit card balance.
What Are the Factors that Affect a Credit Score?
A range of factors goes into determining your credit score. The more attention you pay to your credit reports and the better you keep track of your accounts, the better your score will be. Here are a few of the most important factors:
– How much debt you have: The more you owe and the longer you’ve been in debt, the worse your credit score will be.
– How much debt you owe: Just like having too much debt will have a negative effect, having too little can be risky too.
– How long it takes you to repay your debts: The less time you take to pay off your debt, the better. If you can pay the full amount each month, your credit score will benefit and you’ll have less time to pay interest.
– How much credit you use: The more credit you have and the more you use it, the worse your score will be.
– How often you miss payments: If you miss payments on your debts, your credit score will take a hit.
Strategies for Increasing Your Credit Score
– Keep your credit card balance as low as possible. This can help reduce your credit utilization ratio, which is the amount of your credit you have versus what you owe.
– Keep your account balances low. This will help you maintain a lower debt-to-credit ratio, which will help your credit score. – Pay your bills on time. Paying a few days late won’t kill your credit score, but late payments will.
– Avoid using the void period on your credit report as much as possible. The void period is the time between the end of one loan and the beginning of the next. The less time there is on your report, the better.
– Avoid applying for lots of new credit while your score is still at a low point. New cards will ding your score immediately. Wait until it’s higher before applying for new cards.
Get to Know Your Credit Report
Most credit score providers will only look at the information in your credit reports. And while there’s no way to change that, you can take steps to make sure that you get the most accurate information in your reports.
– Make sure your accounts are current and accurate. If you don’t open a new account or make a change to an existing one, don’t close it. Make sure the accounts are accurate and up to date.
– Make sure your debt amounts and interest rates are accurate. If you make one mistake in this area, it could have a big impact on your credit score. – Make sure any errors on your reports are corrected. If you have an error on your report, correct it as soon as possible. You have 30 days from the time the error was reported to correct it.
Establish Good Debt and Cash Flow Management Habits
Finally, the most important thing you can do to improve your credit score is to establish good debt and cash flow management habits. Make sure you keep your debts low and that you’re only taking on enough credit to meet your needs. Also, make sure you’re managing your cash flow well. If you can’t keep your bills paid on time, you’ll be setting yourself up for a low credit score. A low credit score won’t necessarily impact your ability to get a loan or buy a house. But it can make it more difficult to qualify for a car loan, to get a job that requires a security clearance or to apply for a mortgage.
Ask for Help When You Need It Most
One important way to boost your credit score is to seek help when you need it. In particular, make sure to take advantage of any free credit scores offered by the credit bureaus. These scores are designed to be as accurate as possible, so you should have a good base from which to work. Also, consider talking to your bank or credit card company about boosting your credit score. Even though you have 10 years to pay off a new card, it’s still possible for a bank to give you a lower approval score if they think you’re going to be late on payments.
You can also work toward improving your credit score by taking some of these steps: – Paying off your credit cards in full each month and keeping your credit utilization ratio as low as possible will help your credit scores. – Keeping your accounts open and reporting accurately will help your credit scores. Make sure you’re keeping your bills paid on time and that any errors are being corrected. – Making one small credit score boost can make a big difference. Minor purchases such as those on your American Express card could have a big impact on your score. – Keeping your credit score from falling too much can also help your score. You want a score between 600 and 749 for the best loan terms and lower interest rates.
Don’t Ignore Minor Disclosures in your Credit Reports
While you want to establish good habits, it’s also important to pay attention to minor disclosures on your credit reports. These typically indicate that your credit score may be lower than it should be. Minor disclosures can range from an account that’s been open for too long to the amount of debt you owe on an account. In most cases, you have up to 12 months after they’re reported to take action and correct them.
The more you know about how credit scores work, what factors affect your score, and how to improve your score, the better off you’ll be. Credit scores are an important part of financial planning, and it’s important to understand how they work and what you can do to improve your score.