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How To Improve A Credit Score

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tangducminh on Deposit Photos

Think of your self-esteem as a credit rating. You walk into a bar, looking to find the love of your life (because … that’s what bars are for in this outlandish, hypothetical scenario), but your self-esteem is too low, so you don’t take any chances (or you can’t take any chances, more accurately, because none of the creditors (potential lovers) will talk to you). But those credit scores with higher (“self-esteem”) are being approached left and right by creditors because they know that … Well, that’s enough of this bad metaphor. But the point is that if you keep your credit score high, then you will be able to get lenders to give you more money (or maybe just some money). Lower credit scores, on the other hand — ehhh. They don’t fare so well. So, it is very important to keep your credit score up. Here’s how to do that!

Firstly, let’s define the C.R.S.

The C.R.S stands for the credit rating scale, and it is a measurement tool that helps lenders determine whether you can be trusted with their money. This can affect interest rates, credit card approvals, and even whether you are approved to rent an apartment. Yeah, this number infects (yes, I mean infects!) your whole, entire life!  

The most commonly used rating scale is known as the FICO score. FICO stands for Fair Isaac Corporation. They’re a data company that founded the credit scoring system back in the late-’80s. Ranging from 300 to 850, these scores are determined by information found on an individual’s credit report. Three major credit bureaus provide these reports that the FICO score then analyzes:

  1. Equifax
  2. Experian
  3. TransUnion

Three distinct bureaus mean that you can have three different credit scores, theoretically. But they won’t differ very much in what they say. The following pieces of information determine your actual score (courtesy of  Wells Fargo):

Payment history: 35 percent

Amounts owed: 30 percent

Length of credit history: 15 percent

How many types of credit in use: 10 percent

Account inquiries: 10 percent  

Remember the higher your score, the better it is for you.

Who cares?

Well. It means everything. So everybody should care! Check out this data that detail just what this range of numbers can mean for you in regards to interest rates, apartment rentals, car loans, mortgages and many, many other things, too:

Credit scores & what they mean:

800 – 850

Great! This is a fantastic place to be for your credit score. You should have no issue securing a home loan at low interest.

740 – 799

Good. Not perfect, but certainly not bad either. Your interest rates will still be solid and you’ll still be able to secure things like credit cards, loans and apartment rentals.

670 – 739

Though not terrible, you should still try to do what you can to improve your score.

580 – 669

Bad. This is when you should start worrying since now you’re considered a “subprime borrower.” You might be denied a home mortgage outright and interest rates will be high.

300 – 579

OMG. Abandon all hope ye who enter here. You’ll likely be denied for any loans and won’t be able to open up new credit cards.

Credit Karma and Mint can help you figure out your credit score. 

But first you should know that, under the law, everyone is entitled to get one free copy of their credit report every 12 months from each of the three nationwide credit reporting companies. Go to annualcreditreport.com, the only authorized website for free credit reports, or call 1-877-322-8228.  

Delete your debt

I know. That’s obvious. But hear me out.  It might be easier than you think, in fact. Operative word: easier. Not easy. Here are a few tips to do so.

First, find out how much money you owe (duh!). The first step to getting out of debt is being real with yourself, and looking at that debt figure square in the face. Truth be told, the debt companies want you to be in the dark. So don’t play into their hands.

Decide what to pay off first. Consider paying off the debt with the highest interest first. Doing so will save you more money down the road and can be psychologically beneficial when you see the biggest drain on your money gradually disappear.

Tap into hidden income to free up some money. This is money you can get by negotiating down payments from areas like your insurance, phone bill, or even your rent.

Keep your credit cards

Do not fall into the rookie mistake-hole of deleting your cards as if that will annul your debt. It is not the correct strategy. Fifteen percent of your credit score is determined by your credit history. So, if you close accounts, you close that history.

This action also negatively impacts your “credit utilization rate.” More on this below.

Pay attention to your credit utilization rate

Your credit utilization rate impacts a full 30 percent of your credit score. There is a formula to calculate your CUR and it is pretty simple: (how much you owe) / (total credit available.) The lower this number is, the better. As you’ll notice, this is the opposite of the higher-the-better situation with your credit score. Here is an example of calculating your CUR:

If you carry $1,000 debt across two credit cards with $2,500 credit limits each, your credit utilization rate is 20 percent ($1,000 debt / $5,000 total credit available). If you close one of the cards, suddenly your credit utilization rate jumps to 40 percent ($1,000 / $2,500). But if you paid off $500 in debt, your utilization rate would be 20 percent ($500 / $2,500) and your score would not change.

Even without the jargon, just know that a low CUR shows lenders that you don’t spend all of your credit, usually, and thus have a low chance of defaulting on payments to them. So you aren’t a big risk for losing them money. And money makes the world go round (sadly). Two ways to improve your CUR are by:

  1. Not carrying around a lot of debt on your credit cards.
  2. Increasing the amount of credit available to you.

Lastly, automate your payments

Considering that 35 percent of your credit score is determined by payment history, it is important to pay on time. Automating the process will excise human error and sheer forgetfulness.

Takeaway

Take the time to start improving your credit score now. It’s worth it! A healthy credit score can make life very pleasant for you. Conversely, an unhealthily low credit score can be a real pain in the butt. The good news is that, through a little effort and discipline, we can all improve our credit scores.

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