Having a strong credit score is key to your financial health, allowing consumers to access lower interest rates and better terms on mortgages, credit cards, auto loans, and more. Lenders look at your score to see how well you have managed credit in the past, using it as an indicator of how likely you are to pay back the money they loaned you in the future.
Credit scores typically range from 300 to 850; the higher the score, the better your credit and the more attractive rates offered. Could you improve your credit score before applying for a loan? This is what you need to know.
How Your Credit Score Is Determined
You cannot build your credit score if you are not sure how it was created. Three main offices calculate your credit score, but there is no specific formula that dictates your score. However, five key factors influence it:
- On-time payment history – Most credit experts believe this is the most important factor, accounting for up to 35% of your credit score. This number can decrease even with a late or late payment, so it is vital to always pay your bills on time.
- Length of Credit History – This metric is based on how long you’ve been building your credit. The longer you’ve been borrowing money and paying it back on time, the higher your credit score will be.
- Credit Utilization – This is related to the amount of available credit you are using. Let’s say you have a credit card with a limit of $ 1,000. Even if you pay your credit card bill in full every month, experts suggest that you should only use up to 30% of your available credit anyway; in this case, $ 300.
- How much credit have you applied for: On the other hand, lenders do not like to see that you have applied for multiple credit cards or loans at the same time. This is because even if you don’t use them, the lender will see that you could theoretically maximize all of them at once, making it a less attractive credit risk.
- Credit mix: These are the different types of credit you have, from credit cards to car loans, mortgages, and student loans.
Eight ways to improve your credit score
Now that you know what factors affect your credit score, you’re probably wondering how to improve your score, so here are eight ways to get started today:
1. Find out your current credit score.
Wondering how your credit is doing now? While the three bureaus maintain separate credit scores, you can monitor them all through one portal. Visit the Valley Strong Credit Union website to access the portal where you can check your credit score. You can typically only check each office once a year for free, but during the pandemic, all three offices began providing consumers with free weekly access, a benefit that continues through April 20, 2022.
2. Report any errors.
Look for any errors; For example, if they reported that a payment was “late” that you know was on time or if your name is mistaken for someone else’s. Contact the credit bureau and report the information as inaccurate so they can correct it.
3. Pay your bills on time.
As the most important factor in your credit score, it is imperative to pay your bills on time, at all times. Setting them up for automatic payment can ensure that you never accidentally miss a payment.
4. Make your debt payments.
If you already have credit card debt, that’s fine. The key is to start paying it consistently. Make a list of all your debts and start paying them off one by one, while still making at least the minimum payment on each of your bills. Another option is to apply for a personal loan. This will allow you to pay off multiple debts and only have one loan with one payment each month.
5. Don’t cancel an old credit card.
Remember where we talked about the length of credit history? As you start receiving more credit card offers, perhaps for one with better benefits, it can be tempting to cancel an old card. However, closing a long-standing card can lower your credit score. A better strategy is to keep it, even if you don’t use it regularly. Consider having a recurring bill, like a streaming service, applied to you every month to make it appear active, but you don’t have to actively manage it. Just make sure you set it up for automatic payment so you don’t forget to take care of it.
6. Manage your credit utilization.
As mentioned above, most experts recommend that you use only 30% of your credit. If you are consistently exceeding that, you can ask your credit card issuer to increase your limit or request a new card so that you can split your expenses more evenly.
7. Don’t apply for too much credit at one time.
Every time you apply for a card, it can affect your credit score, even if you don’t end up opening that card. The only exception is if you are looking for a car loan or mortgage. Credit bureaus realize that savvy clients will search and search a variety of lenders to ensure they are getting the best deal. So if you make multiple inquiries about a car loan or mortgage in a short period, such as a week, that will only count as one inquiry against your credit.
8. Keep checking your score.
And we go back to the beginning. Don’t forget to check your credit regularly to make sure you haven’t inadvertently forgotten to pay a bill or have a credit problem that you need to take care of. By implementing the steps above, lenders and creditors will have more confidence in you when they apply for a loan in the future, which will result in a lower interest rate.
