Credit Score 101: How to Fix Your Credit Score
A credit score is an important factor in someone’s financial life. It is a three-digit number used by lenders to decide whether you qualify for a credit card or a loan. A higher credit score gives you a greater chance to be eligible for loans and credit cards with favourable conditions. To fix your credit score, one must start by fixing the issues that may be dragging them down so that the score goes up. The process of fixing a credit score has several steps some of which are establishing a tracking record of ensuring you pay bills in time, paying debts, and taking advantage of tools that allow you to update your credit file e.g. Experian boost.
Calculation of credit score
The credit score is calculated using a mathematical logarithm to information from one of your three credit reports. The logarithms applied to differ from one lender to another. The degree of determining the status of someone’s credit score varies but what needs to be done to improve the score is constant for every scoring model. Factors taken into consideration by the models include checking your payment history, determining the recurrent amount of credit you regularly spend, how long your score has had accounts open, the types of accounts and how often you apply for new loans.
Steps followed to improve credit score
The very first step is checking for the credit scores online. From this, the information on the specific issues affecting your credit score is elaborated. This information helps one to understand what they need to do to start improving their scores. It takes some time for the changes made to be reported to the creditors and to be reflected in your credit status. Credit history and utilization ratios are important factors in each model and are up to 70% influential on the credit score value. The information on credit score is however more dependent on recent payment patterns.
The following are actions taken by a borrower to improve their credit score:
- Bill payment on time
Most lenders are always interested in how reliably a borrower pays their bills. The past payment performance serves as a prediction of future payment performance. Paying all bills within the agreed payment time every month can influence your credit status positively. Late payments and below the standard agreed value payments affect the credit score negatively. It is advisable to use resources and tools such as setting reminders and using automatic payment plans to help ensure on-time bill payment every month. Late payments and missed payments make a negative impact for up to seven years on a credit report. The recent defaults have a greater effect than the older ones.
- Upload credit for making utility and cell phone payments
Those who pay their bills using cell phones on time have the advantage of improving their score using new free products i.e. they do not charge a transfer fee. Some of the products offer services such as checking credit reports and score for free.
- Pay off debts
The credit utilization ratio is a key factor and it is determined by the addition of all current credit card balances and dividing by the total credit limit of an individual. The average credit utilization ratio is calculated from total statements for the past 12 months divided by 12 to give the average score per month. The better the credit score the lower the credit utility percentage value. Lenders always prefer a low credit score utility value mostly 30% or less which shows that someone is likely to manage their credit well. To positively impact the credit utilization ratio, ensure that the debts are paid off and credit card balances are kept low. Additionally, being an authorized user on someone’s account makes a positive impact so long as they have a good credit status.
- Apply for and open new credit accounts.
Only needed accounts should be open since unnecessary credit can have a detrimental effect on the credit score. They lead to temptations of overspending and accumulating debts hence a bad credit mix.
- Do not close unused credit cards
Closing an opened account e.g. a credit card account can increase the credit utilization ratio. Keeping them open is a good strategy if they do not cost any yearly fees.
- Avoid new credit application
Applying for new credit increases the overall credit borrowing limit but also results in a hard inquiry on the credit report. Several hard inquiries have a bad impact on credit scores that last up to two years.
- Dispute inaccurate information on the credit reports
This step involves monitoring the credit score regularly. Credit reports are checked on credit bureaus to ensure there are no inaccuracies that may drag the credit score down. In case of any errors on the reports see to it that it is corrected, and the listed accounts verified.
The length of time taken to rebuild and enhance credit score once defaulted depending on the reason that led to the credit issue. A good credit score helps one to qualify for the best interest rates and conditions when borrowing a loan. Most lenders always check on credit reports and credit scores before allocating a loan or credit card. regularly checking on personal financial well-being is important since a positive credit score can open doors.