Repairing a poor credit score requires both time and discipline. There is no such thing as a quick fix.
A credit score is based on a few calculations. Different companies use different algorithms. That’s why if you compare results from major credit reporting bureaus, the answers can be different. One source might give you a total sum of 760, while the other one might show you a figure close to 680. Despite the difference, rest assured that all these firms consider five critical issues. The only difference is of the degree.
Although your lender can pull out a different credit report, most (90%) of banks will consider your FICO score. On this scale, your credit score is ranked from 350-850. Anything above 800 is deemed to be exceptional and will get you a low-interest rate as well as favorable terms. If you are looking to apply for an FHA loan, you can become eligible even with a score of 580. However, competition is going to be tough, and the interest rate won’t be flexible for you.
Before you purchase a house, consider taking some time to improve your score. If your current rating is 720, take it to 780. That will help with your purchase and will help you save money in the long-term. Let’s say you are purchasing a $200,000 house with a credit score of 620. If your score becomes 760, you can save $66,000 in interest rates. That’s a considerable saving even if it is spread in the next 30 years.
In this article, we’ll discuss the five steps to help you improve your credit score.
Step-1: Fix the Errors in Your Credit Report
You are entitled to a free report, once every year, from three of the major credit reporting bureaus. Get your report and review it carefully.
Your credit report explains personal information, such as your name, address, and employment. Public records (foreclosures, bankruptcies) are a part of your credit report. Another section talks about opened & closed credit accounts. It is your payment history. Finally, they have listed new credit inquiries.
Read the information. Immediately contact the respective credit bureau online if you find any discrepancies in their report.
Fixing errors may not increase your score, but it is your first step in the right direction.
Step-2: Improve Your Payment History
More than anything, lenders want to see a proven record of payments made on time. Your credit report may include utility bills. So, you must pay all your bills and loans on time. Delinquent payments can drag down your score by 35%, and that’s true for all algorithms. It is a famous statement that your score can decrease by 100 points if you miss one loan installment. However, the score tends to go up quickly as soon as you start paying loans on time.
Step-3: Limit New Credit Inquiries
The exact number can vary from firm to firm. However, the increasing number of loan applications can reduce your score by 10%.
Credit inquiries remain on your report for 24 months. It is challenging to pay multiple loans each month. That’s why an increasing number of loan applications are not considered a positive sign for your credit score.
Step-4: Don’t Close Old Credit Cards
Your payment history has a 15% share in your credit report. How long have you been borrowing money? Have you been responsible with money?
Lenders like to see an extended credit history with on-time payments. That’s why, if you have any older credit card accounts, you should not close them. Let them contribute positively to your credit maturity.
Step-5: Reduce Your Credit Utilization Rate
What is your credit utilization rate? Plug the numbers in this formula.
Let’s say, combined, the limit of all your credit cards is $10,000. Your regular expenses make up $2,000. That means your credit utilization rate is 20%. You have not maxed your credit cards yet. Lenders like to see a credit utilization rate of less than 30%.
Payment history and credit maturity are highly influential when it comes to credit score calculations. However, the diversity of your loan accounts, utilization rate, and loan applications also affect the result. Limit your loan applications. Try not to have multiple types of debts. Be careful with monthly payments because they matter the most.