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Thursday, March 28, 2024

    Improve Your Personal Credit Score

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    Your financial credit score is a business metric tied to almost everything you do on the lending front. Your credit follows you everywhere you go, like your shadow. It doesn’t matter if you are applying for a job or getting an auto loan. Your credit score can have an impact on daily life. There are specific steps you can take to improve your personal credit and raise your scores.

    Interestingly, bad credit practices can disrupt your credit score and lead to many other problems associated with this. It can take years for those with a bad credit score to rebuild their credit history in a way that minimizes damage.

    The Basic Ways

    Fortunately, several tips and tricks can improve and rapidly increase your credit score – we will get to all those tips and words of wisdom in a moment – but nothing can improve and solidify your credit score faster than using your credit options judiciously and paying all your installments and bills on time.

    “If you are trying to give people advice for improving their score, pointing them toward those two components – things that are relatively easy to change – is a very good start,” said Tatiana Homonoff, an assistant professor of Economics and Public Policy at New York University. “There are some parts of the credit score algorithm that are very hard to effect, but paying bills on time and being aware of credit utilization are things people can do with some ease, even if they’re in a tough financial position.”

    Americans are working on their credit scores and are trying to rectify the damage long done. The credit ratings for FICO hit a record high of 711 in July of 2020. This is a drastic 11-point increase from the same period in 2018. Better cumulative credit scores mean customers are better positioned to avail credit and reap benefits from it.

    In this article, we take you through our credit score guide. This article gives you a fair indication of how you can realistically improve your personal credit and raise your scores.

    A credit score is a numeric figure that summarizes your credit history. Lenders and financial institutions commonly use credit scores. They are used to measure an individual’s credit readiness. Credit score assign a probability to the chances that they will repay the amount lent to them on time.

    Credit scores in the United States are mostly rated from a numeric score of 300 to 850. 300 denotes an extremely poor credit rating, while 850 denotes a near-perfect credit rating. Higher credit scores indicate good credit history, with timely loan payments. Low credit scores usually indicate a bad credit history. Low credit scores indicate that individuals have delayed payments on loans for significant periods. They are as sign that an individual has not done anything to manage their financial situations.

    There are no exact cut-offs or other indications for a good or bad credit score; however, financial institutions use different figures to reject or approve various loan applications. Most lenders consider a score above the range of 720 ideal and approve loans made by individuals falling within this category. On the flip side, lenders find scores below 630 to be problematic and have difficulty trusting individuals with such poor ratings.

    Today’s consumers understand the significance of raising their credit scores and how they can impact their credit history. Consumer behavior saw a drastic improvement when financial institutions focused on credit scores. Borrowers are now aware of the burden of maintaining their credit history and score, which is why they don’t go for poor credit choices.

    According to a recent report published by FICO, almost 90 percent of all businesses and lenders within the United States assume credit readiness for different individuals based solely on their credit scores.

    Understanding the FICO Breakdown

    The FICO report is currently used across the board. We can better explain how to improve your credit score if we have an indication of the factors used to determine this credit rating. Your FICO score uses five different metrics to determine your credit score. Listed below are these metrics, along with their percentage of importance:

    • Payment History; The first, and perhaps the most important, metric used while determining the credit score of an individual is the payment history they carry. The payment history of an individual carries 35 percent importance in the score that is calculated. If you have been paying your dues and balances off in time, you will have a decent payment history and a better credit score because of that.
    • Amounts Owed: The amounts currently owed by individuals to financial institutions and other lenders make up 30 percent of the total credit score. The amount owed is basically the percentage of the credit you use from what is available to you. The higher percentage of the credit you use from what is available, the higher the amount owned. You are considered to be a safe borrower if you use only 30 percent or less than 30 percent of the credit that is available to you.
    • Length of Credit History: The next metric in line is the length of your credit history. The length of your credit history is responsible for 15 percent of your credit score. The longer you have had a credit account, the more will be the length of your credit history.
    • Credit Mix: FICO likes to see a mix of credit from different financial institutions and lenders. Do not fixate on one lender or one institution. The credit mix makes up 10 percent of the total credit score.
    • New Credit: If you have opened up numerous new lines of credit in the recent past, you are at risk of damaging your credit score and can see multiple repercussions. New credit makes up for the remaining 10 percent of your credit score.

    Your credit score will keep fluctuating as you go through life and will not stay the same forever. It is hence necessary that you follow good credit practices and adhere to the tips we have mentioned below.

    Credit
    It is wise to periodically check your credit report for errors or discrepancies.

    Tips to Improve Your Credit Score

    Having discussed the purpose of a credit score and the factors that constitute it, let’s finally move towards the tips you can follow to champion your credit and improve your credit score. There are ways that you can follow to review and improve your score. We mention these tips below and help you become a better borrower over time.

    Review Your Credit Score

    The very first step to fixing your credit score is to review what is inside it. You can get one free credit report every year from each of the top three reporting agencies. Requesting a free credit report has no impact on your credit score.

    First, you should review your credit report. Look for any errors you can dispute. If you feel like your credit score does not do justice to your credit history, then reviewing the reports from A to Z is the best possible fix to find an error and rectify it immediately.

    According to a recent government study, some 26 percent of all consumers had at least one material error in their credit report. While this error may not change your credit score, it is still a good practice to review and fix errors. There could be costly errors, such as accounts mentioned incorrectly, late reporting, debts listed twice, and accounts with incorrect credit limits and balances.

    Notifying the appropriate credit agency of the error or outdated info can positively impact your credit score. Almost twenty percent of all consumers saw an increase in their credit score after they reported an error present inside their report.

    Set up Payment Reminders

    You obtain a good credit score by having healthy financial habits over time. You can start by writing down your payment deadlines in a calendar or a planner and setting up alarms for you to repay them in time.

    This might sound like an arduous process, but constantly keeping an eye on your credit payments and paying your bills in time will eventually raise your credit score and give you the positive results you are looking for here. The process might take a couple of months, but the results will soon arrive and will be in line with what you’re expecting.

    Pay More Than Once

    If you can afford to do so, try paying more than once in a billing cycle. This is a recommended practice that can help you improve your credit and raise your scores. You should pay your bills after every two weeks, rather than waiting for the end of the month to pay. This is another practice that can help improve your credit utilization ratio. Once the utilization ratio improves, you will see an improvement in the credit score as well.

    Contact Creditors

    If you have a problem with payments in time, you should quickly contact your creditors and set up an appropriate repayment schedule. Immediately contact your creditors if you know you are going to miss a payment due date.

    Quickly talking to the creditor and discussing the elephant in the room can mitigate the problem and make it easier for you to manage. However, leaving the problem and not talking about it can have a negative impact.

    Don’t Go for New Lines of Credit

    This is one of the focal discussing points in finance circles today. Some experts might suggest you go for new lines of credit and credit cards, even if you do not need them. This is done to make sure that your utilization ratio decreases as your total credit limit goes up.

    For instance, your utilization ratio is marked at 50 percent if you have a total credit limit of $100,000 and have utilized $50,000 of the total. However, with the same amount of credit used, the percentage will fall down to 33 percent if you get a new credit card and increase your limit to $150,000. These are all imaginary figures, and your situation might vary, but we hope we have the math right.

    However, we believe that opening new lines of credit can harm your personal credit score more than good. The credit utilization ratio will come into impact soon, but the fact of the matter is that opening new credit will dent your credit score far more than what new lines of credit can improve.

    Pay Old Debts Carefully

    If one of your old debts is marked as ‘charged off’ by a creditor, this means that they aren’t expecting any further payments on the debt.

    However, if you get a new source of income and make a payment on the charged-off account, it can bring the line of credit into action again and significantly decrease your credit score. Collection agencies are often responsible for opening old debts and harming the credit score.

    Diversify Accounts

    Credit mix plays a vital role in determining your credit score. You should diversify your accounts and deal with multiple lenders rather than fixating on one. This is a simple step that has the potential to improve your credit score.

    Your personal credit score plays a significant role in determining your credit readiness. You should make sure that you focus on the credit score more and keep paying off debts from time to time.

     

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