If you’re aiming to build credit quickly and improve your existing score, there are a few steps that you can follow, such as paying your bills on time and taking care of any overdue balances. In addition, checking your credit reports regularly to make sure that your financial information is accurate is crucial to maintaining your credit score.
Since creditors, insurers, and employers often check your credit score, ensuring that it is as high as possible can help you out when the time comes. Learning how your credit score is calculated can help you when it comes to securing a favorable interest rate for a loan, applying for a job, or renting a home.
How is Credit Score Calculated?
Through a unique algorithm, your credit score is calculated from information found on your credit report. It is a three-digit number based on an analysis from the major credit bureaus, namely: TransUnion, Experian, and Equifax.
It is based on factors including:
- How much unpaid debt you have
- Your history of paying bills on time
- The number of loans and loan types you have
- How long your loans have been open
- Your credit utilization ratio
- Any new applications for credit
- Whether you have experienced debt collection, foreclosure, or bankruptcy in the past
Since different scoring models prioritize various monetary factors differently, it can be difficult to find a common score across all models. What might be a “good” score from one company can be viewed as either “excellent” or less positive from another one’s point of view.
What is Considered a Good Credit Score?
Since the definition of a good credit score can vary across different credit scoring models, there are broadly accepted ranges that determine your current level. In general, 580-699 is viewed as fair, 670-739 is viewed as good, 740-799 is viewed as very good, and 800 and higher is viewed as excellent. Having a higher score makes lenders more confident you’ll exhibit responsible financial behavior, making them more likely to approve a loan.
When it comes to taking out a loan, lenders usually consider those with a score of 670 as acceptable borrowers and are more likely to give them better interest rates and terms. However, those with scores in the 580-669 bracket and below might get less favorable loan rates, while those with scores under 580 might have difficulty getting approval at all.
How to Improve Your Credit Score
When it comes to the process of improving your credit score, there are many ways to bring it up by as many as 100 points if your score is on the lower end. The rate of improvement will depend on how important the financial factor is to the chosen credit system.
Create a credit file
If you don’t have a history of credit at all, your first step is to get started with building your credit file. Once they are reported to the major credit bureaus, having several open accounts can help you start building your score. As soon as you have several accounts open, you can start building a positive track record in terms of credit.
If you’re just starting out, you can apply for a secured credit card or get a small, manageable loan that you can easily pay off. With regular financial activity, it takes around three to six months for your file to become substantial enough that a credit score can be calculated.
Make payments on time
Perhaps the most important thing you can do is make payments on time. If you have a history of paying your bills on time, this can help raise your credit score to a significant degree. For instance, if you make payments that are 30 or more days late, this can be reported to credit bureaus which can, in turn, harm your score.
If you have trouble remembering to make payments on time, setting up automatic payments or reminders on your mobile phone can help you avoid missing payments. However, if a bill is beyond your financial means, try and contact your credit card issuer to arrange alternative payment options.
Pay overdue balances
If you have any outstanding balances on credit card bills, one way to build up your score is to take care of them as soon as you’re able. A late payment can be reflected on your credit report for up to 7 years, so it’s best to avoid them if you can. Late fees can also quickly add up and make you fall even more behind on your bills.
If you’re struggling with your current amount of credit card debt, it might be best to consult a reputable credit counselor in your area to address your situation. They can help you create a budget and give you access to free educational materials and workshops as well.
Alternatively, enrolling in a debt management plan (DMP) can get you on the right track if you have an excessive amount of debt.
Consolidate existing debt
Another way to raise your credit score and pay off your debts faster is to consider debt consolidation. This can help you gain access to better repayment terms and interest rates so that you can tackle your debts more effectively. If you’re thinking about consolidating your debt under one lender, you should have a good credit score to qualify for a new loan.
You should also ensure that you have enough income to meet the monthly payments, otherwise, your credit score might suffer. If your credit score is too low, it can be difficult to get a low-interest debt consolidation loan, which can worsen your financial situation.
Apply as an authorized user
One of the fastest ways to raise your credit score is to find a friend or relative who has a history of good credit. If they have a high credit limit, you can ask them to add you to their account as an authorized account holder, and your credit can improve.
The good news is that you don’t even have to use the card for your score to go up. This tactic is the most beneficial for those without a previously established credit history, as it will add some information to your current file and lower your overall credit utilization.
Use only a certain percentage of your credit limit
A major factor that impacts your credit score is the total debit amount on your card as well as the amount you owe. Ideally, you should avoid debt if possible and use no more than 30% of the credit limit that is given to you. This way, you can stay on top of any existing debts you owe and limit your credit card expenses as well.
Take note of any credit report errors
Something that many people tend to overlook is the possibility of a mistake on your credit report. You might not know it, but this can be negatively impacting your score. This includes things like late payments that were paid on time or older financial missteps that should no longer be listed.
Requesting a free copy of your credit report from credit card bureaus and noting down any discrepancies can help you address the situation. You can dispute these errors and contact the relevant bureau, and they should respond to you within 30 days.
Raise your credit limit
One way to lower your overall credit utilization to improve your credit is to ask for a higher limit while still spending the same. You can try to ask your card issuer if you can get access to a higher credit card limit without a credit inquiry that might drop your score temporarily.
You are more likely to be able to request a credit raise if you have experienced an increase in your salary or have added a better history. The way this works is that raising your credit limit will decrease the percentage of funds being used, lowering the credit utilization ratio, leading to an overall improvement in your score.
Sign up for a new line of credit
Another way to build your credit is to sign up for another line of credit. This can increase the amount of credit you have if you aim to keep your credit utilization low. A good credit mix is typically made up of installments and two credit cards. This can help keep your score in good shape since it shows lenders you can manage different credit types well.
Just like all your accounts, it is best to make all your payments on time and avoid spending more than you can afford. It’s also worth noting that opening too many credit cards in a short time can harm your score more than hurting it. Taking on more than you can handle in credit can increase your risk of making late payments and have the opposite effect.
While there are no shortcuts to building credit quickly, creating healthy financial habits can put you on the right path to a good credit score. If your credit score has taken a slight dip due to a single late payment, continuing to make payments on time and settling any debts can help it recover.
However, if your credit score is in need of dire repair, it is best to stick to a debt repayment plan or consider contacting a credit counseling organization for further aid. Have any suggestions? Leave a comment below if you have any tips and tricks on how to improve your credit score!