How to Improve My Credit Score
For banks and employers, a credit score is a fast way to assess a person’s creditworthiness. When it comes to getting a home mortgage, lenders like to use a combination of credit scores, payment history, credit vs. debt ratios, and alternate indicators.
In the U.S. there are the three major credit bureaus.
In short, a credit score is a person’s financial profile. Even though it’s not the ultimate deciding-factor (especially with large loans), many lenders have a “minimum score requirement” to be approved for a loan program. And in many cases the credit score itself is only used as a preliminary check.
* Credit score ranges from 350 to 850, with 850 being the best score possible.
What’s Included in the Report
The higher your score, the more likely you’ll be approved for a mortgage loan. A bad score can influence the rates, and terms you’re offered. For large loans (i.e. mortgage or auto loan), it may determine a lender’s terms and penalties as well.
Credit score breakdown
- Payment history = 35%
- Amounts owed & utilization = 30%
- Credit history length = 15%
- New lines of credit = 10%
- Loan and credit types = 10%
According to a Experian report, in the U.S. the average credit score is 703.
How to Improve Your Credit Score
Fixing your score isn’t an over-night thing, but there are things you can do to improve it significantly within 3-4 months.
Below are three things you can start doing to improve your credit score.
#1. Get A Free Credit Report Online
The first task is to find out what’s preventing your credit score from improving. You’ve probably seen the commercials promoting “free credit reports online”. It’s actually true, but you can get a free credit report (and credit score) from the three major credit bureaus reporting it.
Best Websites for Free Credit Reports
If you’ve already received your free credit report online, you can check use one of the free score estimator on Credit.com or Bankrate Simulator. They will give you a range of where your credit score probably falls. A website such as Credit Karma also gives you a free estimate with their online credit score questionnaire.
Most of your credit card companies will give you a free credit report also.
#2. Pay Off Some Of Your Debts
If you want to improve your credit score, the amount of debt you owe vs. the amount you can borrow (your credit limit) accounts for 25% of your credit score. Since lenders report balances every month, changing that debt-to-credit ratio is the fastest way to improve your credit score.
#3. How To Improve Your Credit Score In 30 Days
A better credit score isn’t something that’s attained overnight. Depending on your situation it can take a month, or several years to fix it.
Here’s 3 things you can do to see results in 30-days.
Pay cards with small balances first.
- Too many cards with outstanding balances can be a huge red flag. If yo can, you should try to pay off the ones that have the smallest balances first.
Don’t over-utilize a credit line.
- Spending more than 75% of a given credit card credit line drops your score. You should work on this ratio and can see improvement on your score for each 10% in available credit that you pay off.
No more late payments.
- Credit score problems such as a late payment (or missed payment) can stay on your credit report for up to 7 years and account for approx. 35% of your total credit score. You can fix that by making sure you don’t miss a payment.
Fewer credit line requests.
Basically stop applying for loans and credit cards. A lender “inquiry” docks your score for about 5 points and stays on your report for up to a year. Having a lot of requests for new account can be a big hit to your score for the next year.
Request a credit line increase.
The only way to lower your credit vs. debt ratio, besides paying it off, is to increase the credit line. It goes without saying that IF you are approved for more credit, that you DO NOT increase your spending. The purpose of the credit line increase is to simply lower your credit-to-debt ratio.
Ideally you want to limit your credit vs. debt ratio to 10-15%.
Example: If you have a $8000 limit on a credit card, try to limit outstanding balance to $800-1200 max.
Special request if you are late.
If you have a history with a lender and don’t have a habit of late or missed payments, they may help you out if you happen to be late on a payment. As long as it was a one-time incident, the customer service rep will probably help you by removing from your score.
After you’ve discussed with your lender, credit report disputes may take up to 30-days.
Get a side job.
It might not be an ideal situation, but mobile app jobs are on the rise – food delivery, local tasks, and home cleaning. In cities like Seattle, gig jobs have better pay and worker protection than years prior.
What Hurts My Credit Score
FYI: Having a “bad” score can double or triple your interest rate vs. 750 or higher credit score.
When you’re applying for a home mortgage loan, your credit score has a big influence on the mortgage terms you get offered. A bad credit score can make the difference between a 5% down payment vs. 10% down payment.
- Don’t close out you credit card accounts. It’s tempting to do so after paying down a lot of debt, but closing an account reduces your credit line, and therefore increases your debt-to-credit ratio.
- Don’t fall for credit repair scams. Don’t trust claims that a company can simply erase large hits to your credit such as a bankruptcy, home eviction, or past foreclosures. During the Coronavirus pandemic, Seattle banks are foreclosing on homes and businesses, which opens the door to unsavory credit repair companies.
- Don’t apply for new credit when paying down debt. Opening a new account seems like a fast fix, but in a lender’s eyes, it makes you more of a risk. Try not to open new accounts if you owe money on a card or personal loan.
How To Improve My Credit Score
There are ways to improve your credit score, but there’s no easy or fast way to do it.
You’ll have to commit to financial discipline to stay debt free. By following some of the guidelines above you’ll be able to negotiate better terms when you want to close on a home or apply for a mortgage loan.