How to Raise Your Credit Score
In order to judge an individual’s creditworthiness, they are subjected to a process that gathers information, mostly from credit bureaus, that depicts items such as a person’s bill payment history, debt to income ratios and other metrics.
The process was created to assist banks in mitigating their losses due to debts not being paid back.
Your credit score will help determine if you are qualified to receive a loan and what the terms of repayment will be. The lower the score means a higher risk to the lender, therefore if you are approved you may receive a higher interest rate, which means the loan will cost you more than if you had a higher credit score and lower interest rate.
FICO is the most used and well-known credit scoring service in the United States.
If you’ve made late payments or missed them altogether you most likely have been penalized in your credit score to one degree or another.
Take a look at this chart that can be found on the FICO website to see how missed and late payments affect a credit score over time.
Here are the 5 components used to determine a credit score. Consider how they might be affecting your score and what you can do to add points in each area:
What Goes Into Your Credit Score?
Payment History – Meaning are you paying your bills on time each month is 35% of your score. If you’ve missed payments the best way to increase your score is to start making them on time as agreed with your creditor. If you need help catching up you may want to ask your creditor if they have a re-aging process that allows you to begin making your payments on time while adding the past due amounts back into the loan. This can help expedite the process of becoming current on your payments again.
Amounts Owed – This comes down to how much you owe your creditors in total dollar amounts. More importantly, it looks at your available credit. If you have a handful of credit cards with high or maxed out balances this score will be lower. The best way to increase this score is to pay down your credit cards so that there is a minimal balance being owed. If you are able to eventually pay down your balances consider paying what you do charge to your cards in full each month. This will help maintain your positive payment history while showing your balances as paid in full each month.
Length of Credit History – The longer you have received credit the better. If you have little to no credit history you may consider opening a credit card, using it in amounts you can repay monthly so that you do not incur a high debt ratio and sticking to it. The longer you can do this the higher your credit history score should be.
New Credit – Applying for new credit factors in the number of new accounts you’ve recently opened or applied for, the total number of credit inquiries towards your credit file, the time since you’ve applied or received new credit and the re-establishment of positive credit history after past payment problems. In order to achieve a better scoring factor for new credit, you may want to consider limiting the number of accounts you apply for over a period of time. Should you apply and be denied that can be factored against your overall score. Also, re-establishing your positive credit history as soon as you can, may help increase your scoring factor.
Types of Credit Used – This takes a look at the various types of credit such as credit cards, signature loans, retail cards, installment loans, mortgage loans. Though this is a small determining factor in your score you may want to consider keeping a limited number of loans active in your file at any given time. When looking for new credit make sure to look at the interest and fees structure closely.
Following these tips may help you increase your credit score and recover from your bad credit rating. As most things, it will take time and patience to see positive results. Making sure to lay out an action plan ahead of time can go a long way in providing the necessary structure needed to keep you on track.
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