Your financial lives depend on your creditworthiness. You’ll have challenges applying for a loan or credit card if you have a low credit score. Lenders review our credit report and FICO credit scores when we go for a loan to determine your interest rates. Generally, the higher our score, the lower the borrowing rate we will pay on our loans for our car, mortgage, or college tuition. By practicing creditworthiness, you can learn how to raise your credit score quickly.
Why Your Credit Report And Credit Scores Are Essential
1. Know where your credit score stands before you make financial decisions.
Like a grade on a challenging exam, you can improve your credit scores once you understand your credit report. You need to check your scores often.
2. Buying a home. Our home is our largest and most important asset for most of us. You will need a very good FICO Score ( 740 to 799) for a mortgage lender, which will afford you a relatively attractive annual percentage rate (APR) compared to a fair credit score of 640. See below for cost differences based on a mortgage loan calculator.
3. Car loans and leases. Getting a car may be the first time you need credit. You will need your credit score for either a lease or a loan. You need to understand the difference between a car lease and a car loan because creditors treat them differently. Leasing a car pays for the depreciation of the car during the time of your lease. You don’t own the car at the end of the lease, so it is not an asset (unless you buy it for an incremental cost). Car loans are more expensive because you’re paying for your car.
4. College loans. Parents may be footing part of the bill with a loan, or you, the college student, may be paying for part or all the cost with a loan. While your credit score is not a factor when getting a federal student loan, private lenders consider your credit history.
5. Check for mistakes, identity theft, and fraud. An FTC study found that 20% of Americans have errors on their credit reports, and for a quarter of this group, the errors are large enough to hurt your ability to get a loan. That should be an incentive to routinely check your score.
6. Getting a job. Credit checks are part of the screening for all new job applicants as employers look to reduce their risk in hiring practices, scrutinizing for late payments and responsibility
7. Renting an apartment. Landlords request access to prospective tenants’ credit checks through landlord associations and tenant screening services. They are looking for red flags, notably bankruptcy filing, late payments, evictions, accounts in collection, car repossessions, and minimum payments on credit cards.
What’s A “Good” Credit Score: Ranges Per Experian:
- 800-850 Exceptional
- 740-799 Very Good
- 670-739 Good
- 580-669 Fair
- 300-579 Very Poor
Can You Improve Your Credit Score?
The short answer is yes, you can! We will go over the tips below to increase your scores. First, let’s talk about how Your FICO® Score☉formula is calculated with its five different criteria for the total:
Payment History: 35%
This category carries the most significant weight in your score as the most influential factor. The longer the credit history, the better. A positive track record of not missing payments and being on time works highly in your favor. Those new to being approved for their credit cards must show a consistently positive pattern. These are different account types: credit cards, retail or store accounts, installment loans, mortgages, and finance company accounts.
Credit Utilization: 30%
As a significant influence on your credit score, credit utilization is the ratio of your total outstanding revolving credit balances divided by full available credit. Revolving credit refers to your credit cards and lines you may have but does not include your car loan (unless on your credit card) or your mortgage.
The utilization ratio is the balance of debt to available credit or debt-to-credit. It measures how much credit you have used for your available amount. You don’t want to “max out” your cards. You should not exceed a 30% ratio, as it will impact your score. Stay below the 30% level if you use your card often.
Credit History: 15%
How you handle credit is essential to lenders. The length of time of your oldest credit account and the average age of your accounts determine your credit history. The older the account, the better your credit score. If you are new to obtaining credit, it will take time to benefit from showing up in your score.
Credit Mix: 10%
Lenders favor some variety of borrowing in your mix of credit. A borrower handling different kinds of debt products may reflect less risk to lenders. You may be at higher risk when you don’t yet have a credit card. That said, don’t go out and get different kinds of loans to improve your mix.
New Credit: 10%
When you apply for new credit, that inquiry is reported on your credit report for up to two years. That is called a hard inquiry and can negatively impact your credit score, mainly if you make multiple inquiries. However, don’t let it stop you from comparing shopping for the same type of loan. A soft inquiry occurs when you are checking your credit score or report. Soft inquiries do not generate negative hits.
Related Post: Common Credit Mistakes And How To Avoid Them
Ways To Increase Your Credit Score:
1. Check Your Credit Report For Errors
Reviewing your report for inaccuracies and missing information may be the fastest and easiest way to improve the score. If you find an error that says you missed a payment but paid your bill on time, this could help your payment history.
Contact each credit bureau (Experian, Equifax, and TransUnion), and give them specific information about what you believe is incorrect. They must investigate the item(s) you have raised, usually within 30 days. You can do all of this online, but it is a good idea to follow up if you don’t hear back from them.
2. Pay Bills On Time
The credit bureaus require you to pay the minimum amount required on time. They look at your payment history, significantly affecting your overall credit score. Missed or late payments are more challenging to repair and can lead to delinquent payments that take seven years to get rid of on your report.
Automating payments online through your bank portals for credit card companies. Set up online payments with all your loan providers. Stick to a monthly schedule or pay these bills every two weeks to lessen the burden.
Late Payments Forgiveness
Your payment history may speak for itself if you continually pay your bills on time. However, if you realize you missed a payment, call your creditor immediately and correct the mistake by paying the bill on the phone or online. Ask the creditor to forgive your lateness and not report it to the credit bureaus. This maneuver can only be used infrequently, as patterns of consistently paying bills on time are essential to creditors before you see score improvements.
You do not want a collection account to appear on your credit report. Even if you pay that account, it has long-lasting adverse effects. It puts a 7-year stain on your report. Don’t let that be a disincentive from paying off the collection debt as it will stay on longer. You might want to check with the creditor to see if it was “charged off” as lousy debt before making a payment.
Pay Credit Card Balances In Full
Although making the minimum payment on your credit card balance is suitable for your score, it will keep you in debt longer. It is far better to pay off your monthly debt balances in full. Otherwise, you are paying those card balances at high teen interest rates. That may not make the credit card companies happy, but that is not your goal.
3. Lower Your Debt
Keeping the credit utilization at or below the 30% ratio is essential to your overall credit score. Being disciplined about your debt levels is vital for the financial future. This ratio reflects how much of your available credit has been used. Lenders look at debt usage per-card basis and total debt relative to total credit available. On a credit card with a limit of $1,000, you should not have more than $300 due on your card.
4. Request A Higher Credit Limit
Mathematically, requesting a higher credit limit will help your credit utilization ratio if the available credit moves from $1,000 to $2,000 or more. You need to assess your ability to not be tempted by higher credit to spend more. Your purpose should be to raise your credit score and not necessarily use the available credit.
5. Become An Authorized User
Having a relatively “thin credit file” may mean you haven’t been responsible with credit yet. Minimal credit history accounts for about 15% of your credit score. There are a couple of things for you to do.
You can become an authorized user on a parent’s account, though make sure they have a decent credit score. Ensure they use their credit responsibly, or it won’t benefit you.
6. Get A Secured Credit Card
If you are a high-risk borrower with a low credit score, you can apply for a secured credit card, where approvals are more accessible than unsecured credit cards, while debit cards don’t do anything for credit. A secured credit card is where the holder must make cash deposits as security for their purchases. Your credit limits will be far lower, usually capped at around $500. You will need to post a refundable deposit as security. Secured credit cards suit those with a lousy history and little or no track record.
7. Add Utility, Phone, and Streaming to Credit Files
You should consider using Experian Boost to increase your credit score quickly by connecting your online bank account to your Experian credit score. This free tool lets consumers include utility, streaming, and cellphone payments in their credit score calculations. It may provide an incremental boost for those with thin or poor credit history files.
8. Rent Reporting
Similar to reporting your utility payments to Experian, you can improve your credit history by subscribing to rent reporting companies like TurboTenant, which automatically reports your on-time rent payments to TransUnion and Experian, helping you get a higher credit score. However, there is an $8.25 monthly fee.
9. Don’t Close Any Unused Credit Accounts
If you have unused credit cards you no longer use or need, it is better to cut them up or put those cards in a drawer and forget about them. At least they’ll stay on your credit history. Otherwise, you will likely lose a few points off your score if you call the company to close the account. Even with zero balances, closed accounts stay on your credit report for ten years. The exception to de-classing them to your sock drawer is that you will be too tempted to spend or pay annual fees.
How Much Of A Difference Does A Credit Score Make On Your Loan?
It could be a lot of money. Using myfico.com Calculator, here are national 30-year fixed mortgage rates with a 400,000 principal on December 22, 2023, according to the following scores:
Scores APR Monthly Payment
- 760-850 6.253% $2,464
- 700-759 6.475% $2,522
- 680-699 6.652% $2,568
- 660-679 6.866% $2,625
- 640-659 7.296% $2,741
- 620-639 7.842% $2,891
The national credit score based on the average FICO score is 716, with a wide range. We can raise our credit scores incrementally and produce meaningful savings in several ways. A better credit score improves our ability to borrow and satisfy those like our landlord who want us to be creditworthy.
With a passion for investing and personal finance, I began The Cents of Money to help and teach others. My experience as an equity analyst, professor, and mom provide me with unique insights about money and wealth creation and a desire to share with you.