How to improve your credit score
Most Americans do not place enough importance on their credit scores. However, whether it's applying for a car, student, or home loan, apartment rental, or a job that requires handling cash, a good credit score is crucial. But by the time you need to provide a good credit score, it may already be too late to remedy your score. The result could be higher loan or credit card interest rates, or the loss of an apartment rental or job opportunity.
Credit scores range from 300 to 850 and serve as a reference for lenders to assess the risk profile of applicants. The higher the FICO credit score, the better. According to NerdWallet data from 2019, the average FICO credit score for consumers was around 704, which, although falling in the lower range of the "good" category, is still higher than in the past.
To improve your credit score, the first step is to understand the composition of credit score.
Composition of credit score
Credit scoring is determined by several factors, but each factor does not have an identical impact on the final score.
Whether the bill is paid in full before the payment deadline (i.e., payment history) has the greatest impact on credit score, accounting for 35%.
The utilization of total credit limit (revolving accounts such as credit cards or personal credit limits) accounts for 30%. Ideally, the credit limit utilization rate should be less than 30% of the total credit limit. For example, if your total credit limit is 1,000 yuan and you want to improve your credit score, the actual utilized limit should not exceed 300 yuan.
The final three components that make up your credit score are credit history length (15%), account diversity (10%), and new credit (10%). Lenders prefer to refer to credit accounts with a longer history, as these demonstrate a good credit record. At the same time, they also appreciate a variety of credit types, as this indicates that consumers are able to manage multiple accounts flexibly. As for new credit, every time someone checks your credit report, a record is left. Occasional checks do not have a significant impact on your credit score, but too many checks can affect your credit.
Credit bureaus will take these credit behaviors and backgrounds into consideration, and then assign a FICO score based on your credit history. Given the crucial importance of credit scores, individuals with lower scores should address the issues. A negative credit score can lead to various consequences, including loan rejections, higher interest rates, and disqualification from certain job types.
Are you worried about your credit score not meeting expectations? You can gradually improve and protect your credit score by following these methods:
1. Check your credit report
You are entitled to receive free credit reports from Equifax, Experian, and TransUnion annually. You can also obtain an online credit report through AnnualCreditReport.com. When reviewing the report, you need to confirm that all information is correct, including account numbers, credit limits, and balances. If you find any discrepancies, you can raise a dispute with the credit agency. Raising a dispute can help you quickly correct the errors and will not have a negative impact on your score.
2. Pay bills on time
One of the primary reasons for a poor credit score is when individuals fail to make repayments or only partially repay their debts without negotiating new repayment agreements with creditors. If you often find yourself short of funds before bill payment, consider establishing a household budget to keep track of your expenses. Alternatively, you can schedule your payments in your calendar app before the due date. Your goal should be to gradually clear your debts. After seven years, credit scores will overlook records of missed and late payments.
3. Maintain the used credit on the credit card at less than 30% of the credit limit
Have you maxed out your credit card? This practice is akin to sacrificing credit for the sake of greater financial freedom, and it prolongs the time it takes to repair your credit score. Please ensure to repay your credit card debt on time. Once your credit card debt drops below 30% of your credit limit, your credit score will improve. Lenders appreciate a low utilization rate when assessing your available credit limit. Please consider carefully before making future purchases, unless you consistently pay off or nearly pay off the balance each month.
4. Keep the credit card with the longest card age in an active state
You may be tempted to close all your credit accounts, but try to keep the account with the longest card age open as much as possible. It can help you increase your credit age, thereby enhancing lenders' trust in you. You can also apply to become an authorized user on someone else's card, leveraging their longer credit history to slightly boost your credit score. Before agreeing to become an authorized user, please check if their credit is in good standing.
Establishing a good credit takes a long time, but remedying a bad score is not so difficult. Persevere and take gradual steps. As long as you manage your money wisely, you can turn around the lender's evaluation of you.
