Credit Score: How To Improve Your Credit Score Faster
Understanding Credit Scores: Help Increase Your Credit Score
This section covers everything there is to know about credit scores. It is essential to know how credit scores work before actually doing the next steps to improve the numbers. Knowing about the definition, ranges and factors affecting a person's credit score makes increasing the numbers easier.
What is a Credit Score?
What is a good credit score?
A credit score of 700 and above is considered good and can sometimes mean that the borrower can receive lower interest rates depending on the credit company's regulations. This means they can enjoy lower rates of credit at the course of the loan's life cycle. A credit score of 800 and greater is considered an excellent credit score based on the FICO Credit Score Range which most credit companies use.
What is a bad credit score?
People with a credit score of 579 or lower means you have bad credit. Borrowers with bad credit will find it harder to borrow money at competitive interest rates because they are considered riskier than others.
What are the Credit Score Ranges?
Credit score ranges from 350-800 and the higher the number is, the better the chances of getting a loan or any type of credit.
FICO Credit Score Range
- Excellent Credit Score: 800 to 850
- Very Good Credit Score: 740 to 799
- Good Credit Score: 670 to 739
- Fair Credit Score: 580 to 669
- Poor Credit Score: 300 to 579
Why is Your Credit Score Important?
Credit scores are important for you to have easier and faster access to loans and other financial products. It is a way to determine your creditworthiness and whether you are capable to pay for a certain credit offer. Someone's credit score can also determine the amount of an initial deposit required to get a new loan, may it be for a new gadget, housing or mortgage, business opportunities and a variety of other reasons. Moreover, creditors frequently evaluate credit scores, especially when deciding whether to change an interest rate of a certain credit product or credit limit on most credit cards.
What is a Credit Report?
A credit report is a borrower's detailed record of credit history taken from a number of sources such as banks, credit card companies, credit collection agencies and the government. The credit report is prepared by the credit bureaus and creditors use it to determine whether a person is worthy to be offered a variety of credit products.
How Credit Scores are Calculated?
In the United States, there are three major credit reporting agencies: Experian, Equifax, and Transunion. These major credit bureaus report, update, monitor and store credit histories of consumers. While there are some differences in the credit information collected by these three major credit bureaus, there are five main factors evaluated when calculating a credit score. The borrower must take note of these factors especially if the goal is to increase the credit score faster.
What Affects Your Credit Scores?
Payment history determines whether a borrower pays financial obligations on time, and it accounts for 35% of the credit score. This contributes to the largest chunk of a person's credit score and one should have on-time payments. In other words, it is always good to be reminded to minimize late payment at all costs to avoid a negative impact on your credit report.
Total Amount Owed
A borrower's total amount owed contributes to 30% of the credit score and this is where “Credit Utilization Ratio” enters.
What is a Credit Utilization Rate?
Credit Utilization Rate or Ratio is defined as “the percentage of a borrower's total available credit that is currently being utilized.” Lowering this credit ratio can help a borrower increase a credit score. It is best to keep the credit ratio at 30% or lower at all costs to get a higher credit score. Doing this will surely have a positive impact on your credit report.
To compute for the credit utilization ratio, one should divide the credit card balance over the credit limit. For example, if someone has a credit limit of $5,000 and a balance of $950, the credit ratio is at 0.19 or 19% which is considered good. Remember to keep your outstanding balances low to see credit score gains.
Length of Credit History
The length of credit history accounts for 15% of the borrower's credit score. It accounts to a borrower's acquired loans or credit over a period of time. The longer someone's credit history is, the less risky it is. There is more data considered and therefore, it is easier to determine the credit history. Borrowers with longer credit histories could also mean they have higher credit scores.
Type of Credit
The lines of credit (or credit mix) used by the borrower contributes 10% of the total credit score. This factor shows if a person has a mix of installment loans or lines of credit: from credit cards, mortgage, auto loans, student loans, and other credit products. While credit mix only accounts for 10%, it still has an impact on your credit report and should not be taken for granted.
The borrower's most recent or new credit accounts for 10% of the credit score. This shows someone's most recently opened credit accounts such as new credit card accounts and installment loan applied. All the person's new credit activity will reflect on the credit report. It still has an effect on your credit score, so it is also important to take note of the new credit applied.
How to Improve Your Credit Score Faster
Now that the five main factors are laid out, the ways on how someone can raise their credit scores revolve around these which are easier to understand. Knowing about how credit scores work is one thing but knowing how to improve your credit score is another thing. The following are the things you can do that offer credit score improvement.
Make Payments On Time or Earlier
This may come as a no-brainer, yet some people can overlook this. However, if you're someone who recently had a rough patch of financial issues, this may be a problem. Fear not, it can be remedied. As mentioned, credit payment history accounts for 35% of your credit score, and paying on time can increase your credit score. Moreover, paying your debts on time avoids getting higher interest rates on all types of credit products. A rule of thumb: always make sure to make payments on time and your credit score will thank you.
Here's a Pro-Tip
Paying earlier than your due date and increasing the frequency of payments per month do wonders to your credit score. For example, you can pay your debt a week or two earlier or make payments twice a month. In addition, you can also schedule automatic payments whenever there's a due bill if you're someone who tends to forget. This makes sure that you make on-time payments at all times. Ask your credit card issuer how this works.
Strategically Pay Down Debts
Paying debts on time is not enough, you have to strategically pay them. A good strategy can help improve your credit score faster. This is where the credit utilization rate you learned earlier kicks in.
Here's a Pro-Tip
Start paying those debts with a higher balance and higher credit ratio. Doing this can decrease a big chunk of your debt, which makes paying smaller debts easier. If you can exceed the minimum payment required, the better. You can see improvements in your credit score as you continuously do this. Above all, your credit report will also improve.
Raising Your Credit Limits
A borrower's credit limit is the maximum allowable debt a financial institution grants for a certain credit line. So, let's go back to the credit utilization rate again to understand more of how it works. Raising your credit limit makes the divisor bigger and thereby, decreasing your credit ratio. Most credit card companies will offer a credit limit raise, and you might want to avail of this.
For instance, if your former credit limit is at $5000, raising it to $7000 makes the ratio smaller. With a balance of $950, your ratio drops from 19% to 13.6% which is considered even better! Fair warning, if you are someone who is more likely to overspend, this might not be for you. Credit card debt might be a problem.
Work with Credit Repair Services
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