Are you planning to apply for a loan in the near future? It’s important to know that your credit score not only affects whether or not you get the loan, but also how much interest you will pay on that loan. Simply put, the higher your score, the better your rate will likely be. But first, do you know what your credit score is?
|Excellent||740 – 850|
|Good||670 – 739|
|Fair||580 – 669|
|Poor||579 and lower|
Maybe you’ve already been declined for a loan due to a low score. Or, you didn’t get the best rate on your last loan. If your score is less than you’d like, there ARE ways to improve it—and it may not take as long as you think. You may even be able to raise your score by as much as 100 points in a few months! But the key is to get started and change your payment habits—and perhaps even your spending habits.
Here are four steps you can take to improve your credit score:
1. Fix errors on your credit report—According to the Federal Trade Commission (FTC), about 5% of consumers have errors on their credit reports, and they are bad enough to result in higher priced loans or insurance. You’ll want to check your report thoroughly and dispute errors to get them removed. Look for payments marked as late or negative information that’s too old to be listed.
2. Stay below your credit limit—It’s important to understand how your credit utilization relates to your credit score. Credit utilization is the percentage of available credit. It is in your best interest to keep your percentage low, with experts recommending 30% or lower of your credit limits. Here are a few ways to do that:
Make multiple small payments throughout the month, or bi-monthly, to keep balances down. Pay bills early in the month, which might help depending on when your credit is reported during the month.
Ask for a credit limit increase, which will improve your debt-to-limit ratio. If you call your card issuer and ask for an increase, and inquire whether you can get a higher limit without a “hard inquiry”, which can temporarily drop your score a few points.
Pay off balances on the cards with the highest utilization first. But DON’T close accounts until after they are paid off. You can actually damage your score by closing your account, because your debt-to-limit ratio will be increased from closing that line-of-credit. Having cards with zero balances actually strengthens your credit utilization ratio.
Consider a debt consolidation loan to consolidate your balances, which is also good at lowering your utilization.
3. Deal with past-due bills—Payment history is the single biggest influencer on credit scores. So, if you’re behind on any payments, make arrangements to catch up. Each month your account is marked delinquent will hurt your score. And missed payments? They stay on your report for seven years! Sign up for due date reminders from your credit card issuers. It’s an easy way to stay on top of your bills.
4. Refrain from opening new charge accounts, particularly at holiday time for extra discounts.
You also need to be aware of some seemingly innocent things that can also affect your credit score in a negative way. A major financial faux pas like filing for bankruptcy or defaulting on a loan are obvious ways to tank your credit score, but there are many other things that can ding or lower your score— things like:
- Not paying parking tickets
- Renting a car with your debit card—Rental agreements frequently contain fine print that reads they can pull a credit report, and it might be a hard inquiry.
- Not using, paying off or closing out a credit card—Affects your debt-to-limit ratio, explained in #2 above.
- Forgetting about an old gym membership—Failure to pay could end up in collections.
- Overdue library books —Is nothing safe? Hard to imagine that not turning in the latest James Patterson book or Star Wars VHS could lower your credit score, but libraries are cracking down on “deadbeat” borrowers and sending overdue accounts to collection agencies.
- Getting a new cellphone or cable TV—Lenders aren’t the only ones who pull credit reports, and too many of these in a short period of time can lower your score and make you look risky to lenders. Add car and life insurance to this list as well.
- Paying off your car—It seems strange that eliminating your car loan could hurt your credit score. However, credit scoring models are designed to take into consideration both revolving loans, like a credit card, and installment loans, like a car loan. If the auto loan is the only installment loan you have, paying it off could actually decrease your credit score.
Resources: Gobankingrates.com; NerdWallet; Gotcredit.com