One of the most important parts of your overall financial health is having a good credit score. With good credit, you can receive approval with a low interest rate for various forms of debt. Without a strong score, you may struggle to qualify for the loan.
While your score is based on the whole of your credit history, there are ways you can improve it. This article discusses several tips that can help improve your score so you can afford your next major purchase.
What Impacts Your Credit Score?
Before trying to improve your credit score, it is important to understand what factors influence your overall credit score. Your total score is based on a variety of factors, including the following:
Payment History
Your history of making loans and other payments on time accounts for up to 35% of your overall score. Even one payment that is made more than 30 days late can lead to a drop in your credit. The more past due payments you have, the more your credit will be impacted.
Credit Utilization
Your credit utilization rate accounts for around 30% of your credit score. Your utilization is defined as your outstanding balance on revolving credit accounts compared to your account limit. Revolving accounts generally include credit cards and home equity lines of credit. Once this percentage starts to increase beyond 25%, your score can start to be affected.
Credit History
The longer you have a credit history, the better your score will be. Those with less credit history are perceived to have more risk. This accounts for around 15% of your credit score.
Credit Mix
Having a diverse set of credit accounts will help your score. These can include mortgages, auto loans, credit cards, and other forms of debt. Overall credit mix will account for around 10% of your credit score.
How to Improve Your Credit Score
Even if your credit score is low today, there are always ways you can improve it. These are some examples of how you can raise your score both quickly and over time.
Check Your Report and Have Inaccurate or Fraudulent Information Removed
One reason that you could have a low score is that there is inaccurate or fraudulent information on your account. You should carefully review your credit report a few times per year and ensure that everything is accurate. If it is not, you should call the appropriate creditor listed.
The creditor can help you start the process of having inaccuracies removed from your report. If you were a victim of fraud or a reporting mistake, you should be able to get the information removed. Once it is cleared, you will see a significant improvement in your score. The process can take some time, so start as soon as possible to prevent future fraud.
Open a New Account
If you have a low score, you can improve it over time by making payments on time going forward. Unfortunately, those with poor credit or no credit may have challenges opening a new account. One way that you can improve your score is by opening a secured credit card. With a secured card, you will make an initial deposit or funds transfer to the issuer. This amount will become your credit limit on the card.
Since lenders will be taking on no risk, your chances of approval are very high. Using the card will enable you to build credit, as payment activity will be reported to the major credit bureaus. This will, in turn, help increase your score as you will show a history of making payments on time.
Pay Down Account Balances
One of the largest contributors to your overall credit score is your debt utilization rate. If you have high credit card balances relative to your credit limit, you will see your score decline considerably.
If you want to improve your score and financial position, paying down these balances should be your top priority. Not only will you decrease your utilization, but you will be able to save money through reduced interest. An advantage of this is that you will see an immediate score improvement once the balances are paid down.
Make All Payments on Time
Your payment history is the largest contributor when it comes to your credit score. Because of this, making loan payments on time should always be a top priority. Eventually, late or missed payments will fall off your credit history and will be replaced by successful loan payments. This will end up providing you with a great credit score that can allow you to pay for many major purchases.
Avoid Major Purchases When Applying for Credit
When applying for a mortgage or other loan, avoid making other major purchases. Spending a lot of money and opening new accounts can require new underwriting of your loan. Further, adding accounts and inquiries could affect your credit score, which will impact your qualifications.
Finding ways to improve your credit score is important to your financial future. With a high score, you improve your chance of approval and qualifying for low rates on loan products. Missed payments, high revolving credit balances, and length of credit history can all affect your score. So be sure to reduce your credit utilization, make payments on time, and manage a secured credit card properly to raise your score. Then making big purchases will be a much easier lift!