Understanding Credit Scores and How to Improve Them
Your credit score plays a crucial role in your financial life. It’s a numerical representation of your creditworthiness, used by lenders, landlords, employers, and even insurance companies to assess your risk as a borrower. A higher credit score not only increases your chances of getting approved for loans and credit cards but also allows you to qualify for better interest rates and terms. Read further to learn how to improve your credit score.
What is a Credit Score?
A credit score is a three-digit number that ranges from 300 to 850, with higher scores indicating better creditworthiness. The most commonly used credit scoring models are FICO® and VantageScore®. The factors considered when calculating your credit score include:
Payment History: The most significant factor, accounting for about 35% of your credit score, is your payment history. Lenders want to see a track record of on-time payments for loans, credit cards, and other debts.
Credit Utilization: This factor makes up about 30% of your credit score. It measures the percentage of your available credit that you are using. Keeping your credit utilization below 30% is generally recommended.
Length of Credit History: A longer credit history can positively impact your score, making up about 15% of the total. It considers the age of your oldest account and the average age of all your accounts.
Credit Mix: Lenders prefer to see a mix of different types of credit, such as credit cards, mortgages, and installment loans. This accounts for about 10% of your credit score.
New Credit Applications: Opening several new credit accounts in a short period can be seen as risky behavior. This factor makes up about 10% of your credit score.
How to Improve Your Credit Score:
Check Your Credit Report: Start by obtaining a copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion). Review the reports for accuracy and dispute any errors or inaccuracies.
Pay Your Bills on Time: Consistently making on-time payments is the most effective way to boost your credit score. Set up payment reminders or automatic payments to avoid missing due dates.
Reduce Credit Card Balances: Aim to keep your credit card balances low compared to your credit limits. Reducing credit card debt can significantly improve your credit score.
Avoid Closing Old Accounts: Closing old accounts may shorten your credit history and negatively impact your score. Keep old accounts open, even if you don’t use them regularly.
Limit New Credit Applications: Avoid opening multiple new credit accounts within a short period. Each application can result in a small, temporary decrease in your credit score.
Diversify Your Credit Mix: While you shouldn’t open new credit accounts just for the sake of diversity, having a mix of credit types, such as installment loans and credit cards, can positively impact your score over time.
Settle Past-Due Debts: If you have any past-due debts, work on settling them. Negotiate with creditors or consider debt consolidation options to get back on track.
Become an Authorized User: If you have a family member or friend with a good credit history, ask if they can add you as an authorized user on one of their credit card accounts. Their positive credit behavior can benefit your score.
Improving your credit score takes time and responsible financial behavior. It’s essential to be patient and consistent in your efforts. Regularly monitor your credit score and credit report to track your progress. You can ask the help of a reputable accountant in your area to give you an in-depth financial analysis to help you with budgeting and spending. Remember, a higher credit score not only opens doors to better financial opportunities but also provides peace of mind as you work towards achieving your financial goals.
If you want to improve your credit score, seek help from a reputable financial advisor to ensure you are making the best decision. One of the most trusted accountants you can turn to is Greenlight Financial. Call 305- 860-5970 to get unique and tailored financial strategies that will help you make the right choices to achieve the best credit score possible.