Are you considering taking out a loan or a new credit card? If so, having a decent credit credit score is key if you want to get quick and hassle-free approval from a lender. The better your credit score, the easier the process will be and your terms will ultimately be more favorable. It will also enable you to save money in the long run. However, in this day and age, keeping up a good credit score is not always so simple and sometimes it requires a little more effort.
For that reason, before we discuss 6 steps on improving one's credit score, it is important to know the answers to three basic questions:
What is a credit score? How is it determined? Why is a credit score important?
Typically, there are three companies that provide credit reports for the consumer as well as for the creditors and potential creditors. Those three companies are Equifax, Experian and TransUnion.
Firstly, a credit score is a number that is calculated using a number of variables. Those variables and calculated percentage derived are formulated using one's credit history. In short, it will enable a bank or lender to decide whether or not they will approve you for a loan or credit card.
In addition, although there are a number of credit scores available for the consumer and creditor, the most impactful and trusted credit score that is provided is called FICO. FICO is an acronym that stands for Fair Isaac Corporation.
Secondly, the FICO credit score is financially calculated by blending five areas of one's current use and handling of credit. The score takes into account and assigns a weighted percentage of five particular specifics. Those specifics include any current outstanding credit balances (35%), the individual's credit history (30%), the different types of accounts that the individual carries (15%), any outstanding balances (10%) and applications for new lines of credit (10%).
Additionally, FICO scores range from 300 to 850.
· 750 to 850 is excellent
· 700 to 749 is good
· 650 to 699 is fair
· 600 to 649 is poor
· Below 600 is bad
So, if the question is asked whether you know what is a credit score is or more importantly what your credit score is, would you be able to answer? This is a critical number to know because so much is contingent upon this number.
Specifically, a credit score is heavily used to determine what interest rates the potential borrower may be able to lock in when it comes to purchasing a car or acquiring a mortgage or other applications for credit. It stands to reason that a high credit score equates to lower interest rates because a high credit score is a reflection on one's ability to manage credit well. Whereas a lower credit score is a strong indicator of not handling credit well and therefore may increase the interest rate due to possible issues related to the handling of credit.
Therefore, having a good to excellent credit score is important because it most likely will save the consumer money.
1. The first step that should be considered towards improving one's credit score is to obtain the credit history from all of the three major companies that keep track of a person's credit history. There are many websites that can be accessed in order to obtain this information. By law this is available to the consumer at no charge and can be done on a yearly basis.
The best ways to do this is by using the Internet and download each of the three credit reports directly onto one's computer.This needs to be accomplished because it is important to go over all of the information. Specifically, study the reports to ensure that the name and addresses listed are correct along with other vital information. This vital information could include date of birth, Social Security number, etc.
Once all of this information has been verified then look at all of the accounts that have been activated in the consumer's name. The purpose of this exercise is to verify that each of the accounts was legitimately requested by the individual and that there is no fraudulent activity such as identity theft and unauthorized transactions. If there are any errors identified, the individual may dispute the accounts or activities and action should be taken to dispute these errors. Generally, on the credit report there should be disclosures as to how the consumer can take action to dispute any of the information on their credit report.
Also, the credit report will itemize any negative items; list the number of accounts in good standing, a reflection of recent requests for credit history, personal information, personal statement, etc. The bottom line is to make sure that all of the information is accurate.
2.The second strategy that can be implemented by the individual to improve their credit score is to work with their creditors. Because part of the score utilizes a person's timely payments, it is important to reach out to the creditors if one is experiencing some sort of issue that may prevent from paying on time. Also, work with the creditor to change the date in which the payment is due to better reflect the times of the month when revenue is more readily available. Also, because the balance reflection in one's account is a calculated percentage against the total money available, the individual may want to ask for a credit line increase on their credit card. This would increase that debt to availability ratio and possibly increase the credit score.
However, it is important not to add to the indebtedness through the use of this increase.
Also, in working with the creditor, it is important to set up payment reminders. This can be done through various software programs or can be activated through the financial institution's website. They will simply send a payment reminder and therefore the consumer can keep track of when payments are due and payment can be made on time.
3.The third strategy to increase one's credit score is to make sure that they maintain their balance of money owed to money available below that 30% limit. This can be accomplished by funneling any extra money at the end of the month to pay down top outstanding balances that carry high interest rates. Practically speaking this may take a bit of discipline to control one's spending, but it can be accomplished by having a garage sale using extra money towards paying down the balance or taking on extra jobs or working extra hours, etc.
4.The fourth practical measure that can be taken to improve one's credit score is to limit credit applications. It is important to remember that an inquiry by potential creditors upon a person's account sends a strong and sometimes negative message as reflected on the credit report. That message being this person needs additional credit and therefore potential creditors are inquiring as to a person's risk of paying back any loans.
5.The fifth strategy tip that can be implemented to improve one's credit score is to make sure not to close any current active credit cards that one may have. Sometimes the thinking may be that it is a plausible strategy to close a credit account and therefore not be tempted to use it. However, as an example, if a credit card has a $5,000 limit and the account is closed, then that is $5,000 less of total credit available. Subsequently, this will reduce the debt to balance ratio and negatively impact the credit score.
6.The final strategy that can be implemented in order for the individual to improve their credit score is to apply for a secured credit card. A secured credit card is an actual credit card with the caveat being that a deposit is required to utilize this card. This card is generally available and used by individuals who have a less than positive credit score; by functioning as a credit card. With the accompanying secured deposit, any transactions made utilizing the card will be offset from the deposited money. Therefore, any transactions made are identified as credit card purchases to the credit agencies, but because of it being secured, the transactions are covered by the deposit that is made by the individual. Ultimately, positive use of a credit card is reflected thus increasing the person's credit score.
It is important to realize that who and what we are is not defined by numbers or facts or statistics. However, a poor to excellent credit score is an indicator of one's financial situation. Sometimes, things happen that can be a great detriment to our financial situation. Some of those items could be the lost of a job, losing a loved one, medical issue, etc. Consequently, although not defined by our credit score a quality credit score equates to a strong financial position and ultimately a pronounced quality of life.