Your credit score is an important factor for major life purchases. Whether it be renting an apartment, buying a car, or applying for a loan, your credit score can be a deciding factor in the process.
If your credit score isn’t what you want it to be, don’t get discouraged.
You can take steps to optimize your credit score and get on the path to sound financial health. It takes time and effort on your part, but the end results are more than worth the work. Here are the topics covered in this article:
What is a Good Credit Score?
Your three-digit credit score falls somewhere between 300 and 850. Any number above 700 is usually classified as a good score. If you are diligent with your finances and have a score above 800, you are in the excellent category.
Having a higher credit score makes it easier to obtain loans and credit cards. High scores also make you eligible for the best interest rates and insurance rates. If you don’t have the best scores on your credit file, you can take simple steps to improve them.
What Factors Go Into Your Credit Score?
To understand how to optimize your credit score, it’s vital to know a little bit about what makes up your credit score. First things first, it should be known that your credit reports determine your credit score.
These reports come from the three credit reporting agencies, Equifax, Experian, and TransUnion. Because each agency has a different file for you, you will technically have three scores; however, the numbers should be relatively similar.
Lenders and other financial institutions are not required to report information to all three agencies, and thus there are sometimes small discrepancies.
FICO, the most well-known and accessed credit score, and VantageScore, the second most used credit score, have computer models that analyze financial data. The resulting analysis is your three-digit credit score.
Although the two companies use the data differently, both are assimilating the same information. There are five main factors that are used to determine your credit score:
- Payment History
- Credit Utilization
- Credit Mix
- Length of Credit History
- New Credit
Your credit report will go through numerous changes that are reflected in your credit score during your life. You must understand how each of the factors here plays a role in maintaining and improving your score.
Ways to Optimize Your Credit Score
The average consumer has a credit score somewhere between 600 and 750. Whether your score has fallen below 600, or if you’re in the average range but want to improve your score, there are steps you can take.
Remember, it takes time to improve your credit score; be diligent and be patient. Here are seven simple ways to optimize your credit score.
Your payment history is the number one factor in determining your credit score. It accounts for about 35 percent of your overall score. Credit models, lenders, utility companies, and even insurance companies want to know they will be paid on time.
If your score and credit report indicate that you have had problems paying on time in the past, it is viewed as a good indicator of how they will be paid. You can improve your score by ensuring all bills, not just your mortgage or car loan, are paid on time.
Your utility bills, cell phone, medical bills, and even rent may be reported to the credit bureau. If you have problems remembering, set your bills up on autopay or set alarms on your smartphone to remind you to pay.
If you are going to be late, contact the company and let them know. It could keep the late payment from going on your credit report. Keep a filing system, either paper or electronically, of all your bills and payments. These records can prove valuable if you ever need to show that you paid your bills on time.
Next to your payment history, your credit utilization is a large piece of your credit score. Reducing the amount of credit you have used brings your credit utilization amount down. You do this by paying down your credit card balances and keeping the balance low.
Here’s how to calculate your credit utilization:
Credit balance on all accounts ÷ total credit limit = credit utilization percentage
For example, if you have a $400 balance on your credit card and your credit limit is $1,000, your credit utilization would be at 40%.
Lenders prefer percentages to be below 30%. When you have a low credit utilization, it demonstrates to lenders that you have restraint and discipline. Set a goal to get your utilization ratio to 30%, then work on getting it even lower.
If you don’t do this regularly, at least do it annually with your free credit reports. You need to take your credit report from all three credit reporting agencies and review every section for mistakes.
The data in your file is not put there by the credit reporting agencies; they collect it. Your creditors (and the humans working for these financial institutions) submit reporting errors much more than they will ever admit. And if you’ve been turned over to collection agencies we can almost guarantee mistakes and errors are peppered throughout your credit file.
If you are determined and want to improve your credit score, disputing negative items can be a significant step forward. Coupled with paying down existing debts, making on-time payments, and other credit optimization strategies, credit repair offers the opportunity to give your scores a significant increase or a new credit foundation from which to build.
Fixing your credit is something you can do yourself. You just need the right resources. Our comprehensive collection of credit repair articles can help, full of free credit repair information. Rather not try and fix your credit yourself? Check out our articles on credit repair companies and how credit repair services work. Either way, there is no reason to delay fixing your credit reports and getting the better credit you deserve. Whether you pay someone to do it or do it yourself, credit repair can start today.
Seeing a high balance on your credit card statement can be a major source of stress. It’s important to be patient with yourself and focus on being consistent, rather than trying to solve it in a day.
Gather your credit card statements and make a spreadsheet or other document showing how much you owe each company and what your interest rate is on each card.
Next, come up with a plan that works for your lifestyle to start paying off the debts. Oftentimes people will start with accounts with the highest balances. Others will tackle accounts that have the highest interest fees. It’s up to you to decide what the best plan of action is.
It also helps to pay extra money on the highest balance each month with whatever you can afford. When that card is paid in full, take the entire amount you were paying monthly on it and apply it to the next card in line. Soon, you will see that this snowball effect has your credit card debt disappearing!
Once your debt is cleared in its entirety, make sure you have a plan for keeping your credit card debt down. If you have to use your credit cards, make sure you pay your balance in full every month to keep your credit utilization low.
Set your credit cards up to send you alerts when your balance is high or at an amount you determine. This will help you keep your balances paid and your utilization rate low. It’s all about practicing self-discipline.
Every time a company pulls your credit, it is considered a hard inquiry and can harm your credit score. Lenders call this “credit shopping” and view it as a negative action. Every time a hard inquiry is reported, your score can decrease by 5 points.
If you are truly shopping for a loan, perhaps for a mortgage, the secret is to make your comparison applications within a short time. The scoring models (FICO and VantageScore) can see when these hard inquiries were made and will not penalize you if they are for the same type of loan and within a 30 day period.
Your credit report may also show soft inquiries. These inquiries are simply requests for information from the accounts you already have open. Creditors check client credit files periodically for changes that might affect the interest rate you have and your credit limit.
This is standard practice and should not be cause for concern. These soft inquiries do appear on your credit file but will not affect your score. The soft inquiries will fall off your credit report in two years.
Cleaning up your credit report may be one of the most important things you can do to maximize your credit score. With that being said, it will most likely take the most time to complete.
If you have accounts in collections, you are probably already getting notices in the mail, phone calls, and possibly even emails from debt collectors. If the delinquent account is yours and it is accurate, talk to these companies and work out a payment plan.
Collection agencies want to clear these accounts up as much as you. Contact them and tackle these bad debts one at a time. While it won’t eradicate the data from your credit file, it will mark it as a paid collection, which lenders look favorably on when reviewing your file.
The accounts, once paid, will fall off your credit file in seven to ten years. Until then, make sure you don’t add any more accounts to the collections list. Like mentioned earlier, this step will take time.
This may seem like a long laundry list of tasks; however, each one will improve your credit if you take the time to complete the steps. Not all will apply to your situation, so use those that do and improve your credit score a little at a time.
How Long Does it Take?
Your credit score won’t be improved overnight or in a month. As the credit bureaus report your efforts monthly, you will see improvements. It can take six months to a year or longer to see significant improvement.
You may want to consider a credit monitoring service so that you can stay on top of your score. These monitoring services alert you every time there is a change to your credit score.
When you are working to optimize your credit, make sure you aren’t slipping back into your old habits. Use the credit you have wisely and pay your bills on time.
You don’t have to let a few bad financial decisions be the end of your story. If your credit score is not where you want it to be, you can take steps to optimize it. Once your score increases, make sure you maintain it through good fiscal habits.