5 Tips to Improve Your Credit Score
Credit scores are the all important factor in a lot of things in life. They can determine whether an individual gets their dream home and for some professions if they get hired or fired. They’re a big decision maker on whether or not someone is ready for retirement, and any time a loan is made they help determine the interest rate. However, nearly 60% of Americans say they do not know their credit score! Good news is, there are a few simple ways to raise a credit score, and continue to improve it.
5.) Pay Bills
This might be the easiest, and most certainly the most common knowledge, but it is also the most important factor which determines a person’s credit rating. Late payments will make a blemish on credit. These start at 30 days of delinquency. A single late payment can stay on a credit score for up to 7 years! What’s more, if it’s 90 days late, this can be seen as a frequent offense and can often times be as damaging to your credit as a collection or tax lien!
So why do late payments make such a big impact on credit? Well, late payments can indicate that someone frequently makes poor decisions financially. Perhaps they bite off more than they can chew or are bad at managing money. In fact, when getting a home loan or refinancing a home, frequent late payments on a credit score can disqualify a potential applicant, even if their credit score was qualifying. From the lender’s point of view, it’s easy to see why. Someone whose credit is low, but makes their payments on time every month, would be a better applicant for a loan than someone who has plenty of late payments but whose score is a little higher. Paying bills within the same month they are due is the best way to avoid these problems.
4.) Keep Balances Low
If you asked a random person on the street if credit cards were bad, most of them would probably tell you, yes! Yet, 8 out of 10 Americans are in debt. The reason for many of them is credit cards. Credit cards can be helpful for establishing credit, however it is good to understand how credit card debt (often times called revolving debt) affects a credit score. The rule of thumb for many people, is to keep the debt under 30% of the total utilization, but others suggest keeping utilization below 20% is more realistic. The reasoning is straight-forward: those who have higher credit scores typically have underutilized credit.
In a hypothetical example of how this works, let’s say you have a credit card with a $10,000 limit. As long as you keep the balance beneath $2,000 every month, this will continue to build positive credit. Purchasing only things you can afford, will certainly help, and also using your cards sparingly will keep this debt down.
3.) Diversify Credit
This tip might seem more at home in a stock portfolio, but it works well on helping improve your credit as well! The idea is to have a few different types of credit because it shows lenders that one is responsible with managing a wide variety of debt. Some good examples would be revolving debt, an auto loan, and a mortgage. Borrowers do not want too many items on their credit report, but for the ones that are there–make sure to manage responsibly. The ideal number for each person is going to be different. The important piece is to make sure the amount of monthly credit is handled effectively.
2.) Not all Credit is Created Equal
You might have heard that “revolving debt is worse than installment debt”. This isn’t necessarily true and it all depends on the person. Unlike installment debt, which has a fixed payment which will end when the item is paid off, revolving debt typically has payments which rise or fall with the amount owed. This coupled with the information above on keeping your balances under-utilized, means that revolving debt can make for a really bad time if it is used incorrectly. In fact revolving debt has the potential to do big damage to your credit score.
Also worth noting is that old accounts are almost always better than new accounts. It is important to keep the older accounts going for long periods of time. That credit card opened as a teenager, if used well, can make for a big positive impact on a credit score for years to come. New lines of credit can look bad to a lender. It could signify that you don’t currently have the money to pay for the items you’re looking to buy.
Another thing to consider is “good debt”. Good debt is anything that is designed to create a positive return. This could be your student loans, a mortgage, or a home equity loan. It’s always better to have a home equity loan on your report, than maxed out credit cards.
1.) Remove Bad Debt
If you’ve found yourself in the unenviable position to have plenty of bad debt, or high balance revolving debt, it might be worth considering a home debt consolidation loan. Using the equity in your home, you could pay down the balances on the credit cards, and therefore not have a mountain of debt on your back.
With a home refinance or home equity loan, it is common for borrowers to save hundreds of dollars a month and have a better financial future. The easiest way to see if you qualify is to speak with a licensed Loan Advisor who can send you a consumer copy of your credit score and provide an in depth financial analysis.