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How To Raise Your Credit Score
Learn how to check your FICO score, find out what it means, and discover strategies to improve your credit.
Anytime you want to make a big purchase, your credit score could make or break your dreams. For example, let’s assume you want to buy a house. Your credit score will be a key factor in securing a mortgage. It can impact which loans you can be approved for and what your interest rates will be. It might even determine which lenders will be willing to approve your loan application. As you may suspect, great credit scores typically allow you to access the best interest rates and loans, while poor credit scores are correlated with fewer options and higher interest rates. Of course, credit scores can also affect things like taking out personal loans or buying a new car, so it’s very important to monitor your score closely.
Before you can do anything, you need to check your credit score. In order to do this, you’ll need to get a copy of your credit report from one of the three major credit bureaus, which are Experian, Equifax, and TransUnion. These credit reporting agencies regularly collect data about your payment history to create your credit report, which contains additional details regarding your payment history, credit utilization ratio, and any open and closed credit accounts. This report will show your credit score, or FICO score as it’s commonly called.
So, how do you know if your credit score is good or bad? You can use the following scale:
Excellent Credit: 800 to 850
Very Good Credit: 740 to 799
Good Credit: 670 to 739
Fair Credit: 580 to 669
Very Poor Credit: 300 to 579
As of 2021, the average credit score in America was 716. But as with any average, there are people who have scores that are much higher and much lower. As such, Experion reports that 40% of Americans have a FICO score under 700. Even people with credit scores as low as 500 have access to some home loans! But of course, people with higher scores tend to fare better in the housing market.
Thankfully, credit scores are not set in stone. In fact, they are typically updated about once a month, or at least every 45 days. If your FICO score is not where you hoped it would be, rest assured that there are plenty of steps you can take to improve your credit score.
Check your credit score carefully.
You should check your credit score through the credit bureau at least once a year. Carefully check your credit report closely to see if there are any errors that are negatively impacting your credit score. Just like people, creditors are far from perfect and may make mistakes when reporting consumer slip-ups. If a mistake has been made, your FICO score could have dipped due to no fault of your own and can now be corrected. If no mistake has been made, you'll get a clear picture of your current credit history and can create an action plan for credit repair. As you work on improving your score, you’ll also want to use credit monitoring to track your progress. In addition to the credit bureaus we have already mentioned, myFICO and IdentityIQ are also great places to start.
Lower your credit utilization.
Ideally, you should only be using 10% or less of your available credit at a time. If that’s not possible, at least make sure your credit utilization is below 30%. You can do this in one of two ways. The first option is to pay off enough of your balance so that your remaining outstanding balance is at 30% or less of your total credit limit. Alternatively, most banks allow you to request a credit increase online. If approved, your credit limit will increase and you will be using a lower percentage of your available credit as a result. However, be careful to not let your spending increase along with your new credit limit, or you’ll just run into the same problem.
Don’t miss payments.
Do your best to pay your credit card down completely each month. If you can't do that, at least make sure you are paying the minimum amount due on time each month and not missing any payments. This will help improve your payment history, as missed or late payments will all lower your FICO score.
Settle old debts once and for all.
If you can, try to pay off big purchases or loans once and for all so those expenses are off your plate. For example, paying off your student loans or car should improve your credit score and be a relief for you at the same time.
Even though it may be a hassle, keep old accounts open and deal with delinquencies, charge-offs, and collection accounts. Work out a plan to make up past-due payments and make sure you don’t miss more payments in the future. You may also want to talk to your bank about taking out a debt consolidation loan to consolidate your debts. Essentially, this loan allows you to pay off all your debts at once so then you only have one remaining loan to worry about.
As these issues get resolved, your credit score will improve and you’ll have the advantage of credit age on your side. The age-of-credit portion of your credit score looks at how long you’ve had your credit accounts, and older accounts are most appealing to lenders. Therefore, it’s better to keep and maintain old accounts rather than close them and open new ones.
Limit hard inquiries into your credit score.
Hard inquiries to check your FICO score are typically done any time you apply for a mortgage, an auto loan, a new credit card, or any other form of credit. Unlike soft inquiries, hard inquiries can damage your credit score for anywhere from a few months to a couple of years. When potential lenders see hard inquiries on your credit report, they could assume you are seeking extra credit because of financial difficulty and see you as a risk, whether that is the case or not. So if you are trying to raise your score, it’s best to avoid trying to apply for new credit of any kind in the near future.
Learn more tips and tricks for buying or selling homes at the Dabl Real Estate Hub!