Happy with your credit score? If not—you’re not alone. While increasing your credit score can seem difficult, it is easier than you think.
Why increasing your credit score matters?
Before learning how to improve your credit score it is important to understand why you should. Your credit score is one of the most important factors when it comes to your personal finances. A high credit score will help you qualify for lower rates on loans, credit cards that offer more favorable terms, better insurance rates, and a long list of other financial benefits.
A person’s credit score or FICO score is based on their payment history record and credit utilization ratio. FICO scores can range from 300 – 850, with 300 being extremely poor and 850 being nearly impossible to. The average credit score for Americans in 2017 was 704, which is considered good, but a score of 740 can significantly improve the home or car loan rates and credit card terms you can potentially qualify for.
How is a credit score calculated?
In a FICO scoring model, 35% of the credit score weight comes from payment history, 30% from credit utilization, and the other 35% from credit age, different types of credit, and number of inquiries. Carrying high balances on credit cards or simply having multiple credit cards in your name, along with many other factors – both positive and negative – can increase or decrease your credit score.
To get your credit score on the right track to increasing, start following these 5 tips:
1. Pay all bills on time
Late payments can drop your credit score – fast.
One of the most important factors to a lender is how reliably you pay your bills. It is important to pay consistently and on-time; your payment history is a strong indicator to lenders on how you will pay in the future. If you have a history of late payments, you are considered a higher risk.
Paying all bills on time includes auto loans, student loans, rent, utilities, phone bills, and so on. There are many tools that can help you stay on track including automatic payments or calendar reminders of upcoming deadlines.
If you are behind on any payments, try to get them current as soon as possible. The sooner you can, the less impact your late payments have on your credit score over time. Older late payments have less effect on your credit score than recent ones.
2. Pay off credit card debt
Your credit utilization ratio is another important number in credit score calculations. This ratio is calculated by adding all your credit card balances and dividing it by your total credit limit. So, if you typically charge $3,000 every month and your total credit limit is $10,000, your utilization ratio is 30%. The higher this ratio, the lower your credit score will be.
The magic number for credit utilization is 30% or less. This shows lenders that you haven’t maxed out your credit cards and you likely know how to manage your credit well.
3. Be selective when applying for new credit
You should only open new accounts if absolutely needed. Multiple hard inquiries generated when you apply for a new credit cards can hurt your credit score. Each credit card application will result in a hard inquiry and each hard inquiry will remain on your credit report for two years.
If you are in the market for a new credit card, it is best to research the credit cards you are considering, rather than inquiring directly. Once you’ve done your research, pick one that best suits your needs and that you will have the greatest odds for approval, then submit an application.
4. Try not to close unused credit cards
If you have a card you no longer use, and they aren’t costing you money in annual fees, keeping it open allows you to have a higher utilization ratio because your total credit limit is higher. Owing the same amount but having fewer open accounts can lower your credit score.
5. Be patient
Last but not least, be patient when rebuilding your payment history. Increasing your credit score takes time. Delinquencies and late payments remain on credit reports for seven years, bankruptcies remain for ten years, and inquiries remain for two years. Overcoming past actions is a lengthy process. But taking baby steps to adopt these recommended practices, will generate positive results.
Remember, no one action or change will increase your credit score. But by following these best practices, you can identify what elements of your credit history are having the greatest impact on increasing your score.
If you are in the market to buy a home, it is especially beneficial to take steps to increase your credit score. We recommend meeting with a lender to get prequalified before meeting with a Realtor to shop for homes. At that time, you can also discuss how your credit score will impact the types of loans you can qualify for and potential interest rates.
At Landmark Title we provide title and escrow services for both residential and commercial real estate transactions. To learn more, visit our website or contact us at (602)748-2800