Simple and easy steps to improve your low credit score
If you are constantly getting denied for credit cards or loans and aren’t having good interest rates for financing, there’s a chance that your credit score must need a boost. Improving your credit score is not an easy task. You must follow some effective tips that can help you start and keep improving it along the way.
The credit score range generally looks like this:
- Excellent Credit: 750+
- Good Credit: 700-749
- Fair Credit: 650-699
- Poor Credit: 600-649
- Bad Credit: below 600
Initially, before improving your credit score, you need to know about the components of your credit score. Practically, most of the lenders and credit card companies prefer to follow the FICO scores. You will find five components that’ll create a FICO score:
- Your overall payment history
- How much credit currently used
- Length of your credit history
- New credit lines
- Type of credit accounts or credit mix
- Your overall payment history – Your overall payment history takes part in the largest percentage of your score, at 35%. Your payment history will include your on-time or late payments and the ratio of both. Certainly, more on-time payments will give you a positive boost and every late payment can hit your overall score. So, from now on make on-time payments for all of your credit card debts and loan payments.
- How much credit currently used – Your credit usage indicates the number of your overall debts, the amount you owe on each of your accounts, the number of your accounts with balances, your remaining balance on loans and your utilization rate (the amount of debt you have vs your overall credit limit). Your credit usage influences 30% of your overall credit score.
- Length of your credit history – It includes 15% of your FICO score. The longer you can maintain your credit accounts responsibly, it’ll help you to build a good credit score. That’s why it is advised to keep old credit cards active even after paying off the debts.
- New credit lines – It makes up 10% of your score. When you apply for a new loan or credit card, it’ll have a short-term impact on your score. It is because lenders or credit card companies will verify your whereabouts by pulling the credit report before giving you approval. The process is called “hard inquiry”. On the other hand a “soft inquiry” doesn’t have that much impact, for example – when you are pre-approved by a lender.
- Type of credit accounts or credit mix – It can also influence 10% of your FICO score. When lenders verify your credit report, they would want to see different kinds of credit accounts in your portfolio. It’ll make them happy as they will consider you as a highly potential customer who has a reputable history of managing multiple credit accounts.
So, if you have a good mix of revolving accounts, such as credit cards, and installment loans, which include student loans, auto loans, and mortgages, you are the one they are looking for. With a great mix of credits and regular payments, your credit score will rise within the next few months.
So, now you know the components, you just have to follow some simple steps given below to find a score you are dreaming about.
Steps to improve your credit score
1. Check the accuracy of your credit report
The first step to improve your credit score is to make your credit report clean and without any error. You have three credit reports, one from each of the 3 major credit bureaus: Experian, Equifax, and TransUnion.
As your credit score is based on the data listed on your credit reports, it’s very important to make that data accurate. If you notice any mistake or discrepancy in your credit report, you should immediately inform the credit bureaus about that.
You can get a free credit report from AnnualCreditReport.com, the government-mandated site run by the major bureaus. If you find an error on all three credit reports, you’ll have to dispute it separately with each credit bureau.
2. Pay your bills on time
Your payment history influences 35% of your score, remember? So, your last good payment history is usually taken as a good sign of your future payments.
You can provide a positive boost to your credit score by paying all your bills on time. Paying late can negatively affect your credit score which you might want to avoid.
If you’re behind on any payments, pay them asap. Late or missed payments will be listed as negative information on your credit report for seven years, but as soon as you pay them off, their impact on your credit score will decline over time.
3. Pay off your high-interest debts as soon as possible
The number of debts you have can heavily affect your credit score. Your total debt taken will be listed in your credit report. The number of credit accounts you are associated with will also be taken into consideration. Your outstanding balances on credit cards and loans are also considered and compared to the total credit available. This is how your debt-to-credit ratio is determined. Your credit score will get a boost if your credit ratio is higher.
How to do that? Simple! Pay off your debts as soon as possible. You can take out a personal, low-interest loan and pay off high-interest debts. Opening a new loan can lower your credit score for the short term, but once you pay off all the credit cards with bigger credit limits, your credit score may get a rise. Make sure you do not close old cards with high credit limits.
If you are having issues with paying off your debt, you may opt for a debt elimination program and get rid of annoying debts, once and for all.
4. Clear up any collection accounts
You should contact your debt collector listed on your credit report. Ask them to stop reporting the debt to each major credit bureaus (Equifax, Experian, and TransUnion). In return offer them full payment. Just make sure to get that in writing before you make payment. Collection accounts are bad for your credit score, so wipe then off asap.
5. Open a secured credit card
In a secured credit card you may deposit into a checking account that “secures” the line of credit the bank or lender is providing you. You can opt for a secured card with bad credit and add a new account with positive payment history. It will help show creditors you’re back in business.
If you default on the payments on a secured credit card, then the deposit you made initially will be used to cover the balance on the card.
Regularly checking your credit report and credit scores are very important if you want to improve your score. Removing errors or wrong information is another crucial thing that you should remember. Whatever you do, do not let your credit utilization ratio to rise.