Your credit score can open the door to financial freedom or it can slam it shut in your face. Your credit score is used by banks and financial institutions to determine if you qualify for loans and how much you’ll pay in fees and interest charges. It can affect your ability to buy a home, car or other large items you can’t afford to pay for with cash. It could also prevent you from having credit for everyday purchases or emergency situations.
Your credit score is a relative measure of your creditworthiness and can range from 300 to 900, with most people in the 600 to 800 range. Credit scores are compiled using the Fair Isaac Corporation’s FICO system. Here are the ways your FICO score is calculated and how to use them to your advantage:
1.) Create a Good Payment History
Your payment history makes up 35% of your credit score. Every late or missed payment you make on any type of loan or credit account (credit card, mortgage, student loan, auto loan, etc.) will reduce your FICO score.
Paying on time is a MUST. Use the lenders online services, if available, to send email reminders when your payments are due. If that’s not an option, highlight your personal calendar to reflect upcoming due dates. Do whatever it takes to be ahead of the game when it comes to payment due dates.
2.) Adjust Your Outstanding Debt
The total amount of debt you carry makes up 30% of your credit score. A comparison is done between the total amount of available credit you have to how much of that credit limit you’ve used. If you’re using 50% or more of your allowable credit it will reflect poorly and lower your credit score.
Carry no more than 35% of your available credit. When you reach the 50% mark, lenders begin to worry that you’re in financial trouble due to a higher percentage of debt. Use cash more often to keep this figure in check, request a credit limit increase or apply for a new credit card to raise your available credit.
3.) Limit Credit Inquiries
Requests for credit, or credit inquiries, make up 10% of your credit score. Every time you apply for a credit card or loan, the lender requests a copy of your credit report. If there’s too many requests in a short period of time, it reflects poorly on your credit score since you appear desperate to lenders.
Be patient when applying for credit. If you don’t get a response within a week, call the lender and ask if your application has been processed and for the results. Apply for another offer only after you’ve determined that the first one was denied. If you’re denied multiple times, maybe it’s time to take a step back and determine the cause rather than applying again.
4.) Use Multiple Types of Credit
The variety of credit you carry reflects in 10% of your credit score. Having different types of retail accounts, loans and credit cards will reflect positively on your credit rating. Although it’s not necessary to have one of each type, having a wider variety of loans and credit accounts will reflect your ability to manage various types of credit and will help raise your credit score.
5.) Length of Credit History
The length of your credit history has a positive affect on your credit and makes up 15% of your credit score. Although there’s not a whole lot you can do to increase the time you’ve been using credit, if you’re thinking about closing old credit accounts for any reason– think twice – since keeping them open will show a longer credit history and help maintain a higher score.
Other Actions to Raise Your Credit Score
Increase your credit limit. This can be as simple as calling your bank or credit card issuer and asking for an increase. If your credit is in good shape and you have a long-standing account with no history of default, it should be relatively easy to get your credit limit raised. With a higher credit limit, your debt-to-available-credit ratio will decrease – helping you raise your credit score.
Check your credit report. Get a copy of your credit report at least once per year. Report any errors and stick with it until they’ve been resolved. Fixing errors on your credit report can have a huge impact on repairing your credit and raising your credit score. Learn how to get free credit reports by clicking here.
Apply for a secured credit card. Without a credit card, you’ll have a hard time building credit history to raise your credit score. But getting a credit card can be especially difficult if you have poor or limited credit. Secured credit cards are great opportunity to move forward – even if you have bad credit. You might be limited with a secured offer – but it could get you moving in the right direction.