Tips for Improving Your Credit Score
Your credit score is one of the most important factors lenders consider when assessing your credit worthiness. The score is a three-digit numerical value based on your credit history. It determines your reliability as a borrower and plays a big role in how much you will pay in interest rates for various loans. Mortgage lenders will conduct extensive research on applicants’ income and credit report to determine if they are a responsible borrower.
Applicants with low credit scores may be unable to afford home loans, such as the FHA loan. This type of loan requires a small down payment and a lower credit score than other home loans. However, if the applicant’s score falls below the required credit score range, he or she may need to work on improving it before qualifying for an FHA loan. Read the sections below for tips on how to improve your FICO score.
Credit Score Basics
Credit scores range from 300 to 850 – the higher it is, the better your score. It can take years to build a strong credit score. However, one missed payment can drop your score considerably. Because of this risk, it is imperative that you perform regular credit checks and change your financial habits when necessary. Find the credit score ranges below:
- Very poor – 300 to 579
- Fair – 580 to 669
- Good – 670 to 739
- Very good – 740 to 799
- Excellent – 800 to 850
There are 3 credit bureaus that collect and store information on your credit history: TransUnion, Equifax and Experian. They capture detailed information on your credit history, such as:
- Your payment history.
- Your open and closed credit accounts.
- The length of your credit history.
- The total amount of your liabilities.
There are two main types of scores: the Fair Isaac and Company score, or FICO score, and the VantageScore. Most lenders rely on homebuyers’ FICO score. The VantageScore, which started in 2006, uses a combination of scores from all three bureaus. These companies use different metrics to determine credit scores, or place different importance on certain factors. Because of this, scores can vary greatly.
Factors that Affect Your Credit Score
Before you learn how to improve your credit score, it is important to know what habits influence it. The most important one is your payment history. Borrowers with a lengthy history of making their monthly payments on time have much higher credit scores than those who have late payments. The length of the late payment also plays a role. The longer you go without paying your bill, the lower your score will be. With this in mind, it is vital that you always make the minimum monthly payments required by your lender to avoid points deducted on your FICO credit score.
The second most important factor affecting your FICO score is your credit utilization. A guideline is to only use up to 30 percent of your available credit every payment period. Utilizing more than that indicates to lenders that you spend above your means and take big financial risks. Lenders also consider the length of your credit history when evaluating your credit worthiness. The older your account, the more trustworthy you are.
Having a good mix of credit also plays a role in determining your credit score. A diversified credit portfolio signals to lenders that you can manage several types of bills, making you a reliable borrower. However, you want to avoid adding on too many accounts at once as that displays impulsivity. That is another factor that influences credit. When you have too many inquiries on your account, which means that several lenders have looked at your credit to evaluate your credit worthiness, it can hurt your TransUnion, Equifax and Experian credit score. This is why it is important to space out your credit applications.
How to Increase Your Credit Score
Recent data from 2018 shows that the average credit score is around 700, with only 20 percent of people having a score below 600 points. If you fit that description, there are several methods you can employ for building credit. Before you can do so, it is important that you request a credit report to know what factors are affecting your score. You may be unaware of delinquencies on your record or inaccurate information. Once you know what is on the report, you can start a plan of action.
The three credit bureaus offer a free credit report to consumers once every year. While it does not include your credit score, it does include pertinent information on your payment history, open accounts and the other factors that influence credit. There are also third-party websites and certain banks that allow you to check your credit score without penalty and get some details on what factors affected your score.
The information on your credit report and/or score will determine the best way to get an excellent credit score. For instance, if you have a low credit score because you have little to no credit history, one of the best ways to build credit is by opening up a line of credit through a secured credit card. This type of credit card requires a cash deposit upfront that serves as collateral, and it is usually the same amount as your credit limit. The goal is to show lenders that you are a responsible borrower and eventually upgrade to a card that does not require a deposit.
However, you may need to employ a different strategy to improve your credit score if you have a high credit utilization and a history of late payments. In this case, the best strategy is to calculate what 30 percent of your credit limit is and use that as your spending cap. Furthermore, set up an auto-payment schedule or regular reminders to avoid late payments. Additional tips for building credit include:
- Always pay your full balance every month – If you cannot pay the full amount, always pay the minimum required amount on your balance.
- Avoid closing credit card accounts with long histories – When you do this, your credit history with that card will also disappear along with the card. As such, this is a drastic measure that you should only use if you have a steep annual fee.
- Do not apply for multiple credit cards at once – This will create multiple hard inquiries on your report and may lower your credit score.