Want to save thousands of dollars? Improving your credit score could save you thousands of dollars over your lifetime that could be used for more important things than high-interest payments.
First, it helps to first know what a credit score is. Fair Isaac Corporation (FICO) is the most commonly used credit scoring system. FICO uses a point scale from 300 to 850 to grade your creditworthiness. Your FICO score is a grade that tells lenders how likely you are to pay a loan back in full and on time.
The higher your credit score the better for you. The average credit score in the U.S. is 636 and the median score at 723.
How do you fix your credit score?
1. Pay your bills on time
By 35%, the biggest component of a credit score is payment history, that is how good or bad you are with paying your bills. Good payment habits show that you’re a good credit risk, so always pay all your bills on time and in full.
2. Lower your credit utilization ratio
Your credit utilization is the amount of revolving debt you have divided by your available credit. Borrowers who use less than 30% of their available credit are less risky. So, get your credit utilization below 30%.
3. Clean your credit report
Because of identity theft, human error and robots, you might have inaccurate marks on your credit report. Fix these errors and your credit score will improve immediately.
Go to www.AnnualCreditReport.com or call 1-877-322-8228 annually to get free copies of your credit reports from all three credit agencies (Equifax, TransUnion and Experian). Review each credit score for accuracy and contest errors, including misspelled names, incorrect addresses and false claims.
Proceed with caution. If you have a history of collection attempts, you may open the floodgates with debt collectors contacting you.
It’ll take time to receive your reports and file corrections, but it’s worth it when your credit report is clean and your credit score improves.
4. Don’t apply for more credit
Don’t open a new credit card account. Don’t apply for a loan. Don’t get a new apartment, and don’t do anything else that’ll cause your credit score and history to be checked for six to 12 months.
FICO is notified every time your credit report is pulled and too many pulls adversely affect your credit score. A six to 12-month hiatus will improve your score.
5. Get a secured credit card
Not to be done in tandem with tip four, open a secured credit card account, use it once a month and pay it off in full immediately. Although the fees may be high, this will improve your credit history. When your credit score is creditworthy, close your secured credit card.
Anyone can fix their credit score. The best way to repair a credit score is to prove your creditworthiness. So, pay your bills on time and don’t overextend yourself.
