If you are applying for a credit card or a loan of any kind—home, auto, personal, etc.—your credit score is very important. Scores range from 300 to 850; if your score is high, 750+, you will likely be approved for a loan at the best interest rate. But if your score is low or non-existent, you may be turned down, be approved for a lesser amount, and/or have to pay a higher rate of interest. If this is the case, do you know how to improve your credit score? We offer some tips in recognition of National Credit Education Month.
What Impacts Your Credit Score?
According to Experian, the average score in the U.S. right now is 711, which is good, but offers room for improvement. Before you can improve your credit score, it helps to know what affects it. In a nutshell, it’s a ranking that gives lenders a sense of how big a risk it will be to give you credit based on the likelihood of you paying it back.
While there are quite a few things that can have small impacts on your score, these have the biggest effects:
- The age of your credit history. If you have no credit history or only a short one, it’s harder for lenders to tell how likely you are to be a good risk.
- The amount of debt you carry. Carrying a lot of debt can work against you if you already appear to be maxed out.
- Bankruptcy filings. Filing for bankruptcy has the single biggest effect on your score, and it remains on your credit report for 7 to 10 years, depending on the type of filing.
- Hard inquiries for credit (when a lender accesses your report to determine your suitability for a loan). While each hard inquiry has a small effect of 5 to 10 points, its effect lasts about year, so you don’t want to have too many in a short amount of time.
- Reports to collection agencies. Again, the impact of one or two is small, but if you have a lot, they will have a significant impact and they stay on your report for seven years.
The number of accounts you have. Avoid opening and closing a lot of accounts.
8 Steps to Improve Your Credit Score
First, it’s important to know that establishing or improving your credit score takes time. There are no quick fixes, so it pays to get started as soon as possible. Set a reasonable goal, such as increasing your score by 100 points over the next 12 months.
Take these steps:
- Get a free credit report. If you haven’t done so in the past year, request your credit report (this does not include your credit score).
- If you don’t already know it, get your free credit score from a company like com, CreditKarma, or others. Don’t use any service that asks for your credit or debit card number.
- Pay off collection accounts. While this won’t remove them from your credit report, it will change them to a zero balance.
- Identify any errors on your credit report and dispute them.
- Automate payments to avoid late payments. Freedom@Home online banking makes this a snap.
- Pay down balances. Start with those that have the highest interest rates to save money over time in interest.
- Secure your accounts with passwords to avoid fraudulent activities, and don’t share your passwords with anyone. Also, shred old credit reports, bills and other confidential paperwork. Here are more tips about cybersecurity.
- Only charge expenses you already have the money to pay off immediately, and then do that.
We are partners in your financial health and offer a number of resources to help you increase your financial education. If you need additional help, reach out and schedule an appointment at one of our branches.