Are you thinking about buying a home soon? If so, it’s important to know your credit score, how it’s calculated and even how to improve it.
What example is a credit score? It’s a three-digit number lenders use to help them decide how likely it is they’ll be repaid on time if they grant you a home loan. The higher your credit score is, the more likely you are able to qualify for a mortgage loan with favorable terms. In the end, this saves you money. Who doesn’t like saving money? We know, we do!
If you’re looking to improve your credit score, you’re not alone! It takes time, but the sooner you address the issues that might be dragging them down, the faster your credit score will rise.
How Is Your Credit Score Calculated?
An algorithm uses data in your credit report to calculate your credit score. Your credit report shows:
- How much you owe
- Length of your credit history
- Payment history
- New credit inquiries
- What kinds of credit you hold such as auto loans, credit cards and lines of credit
Each of these factors carries a certain weight when calculating your credit score. Once the numbers are crunched, you end up with a credit score between 300 and 850. As we stated earlier, the higher the number, the lower the risk, and the more likely you are to qualify for a loan and a lower interest rate.
The whole credit industry is complicated and largely frustrating for the average consumer. What's even more frustrating is the fact that you don’t just have one credit score. You have quite a few of them, and this isn’t common knowledge.
In the United States, there are 3 national credit bureaus that compete to capture, update and store credit histories. These three credit bureaus are: Equifax, Experian and TransUnion.
There are in fact differences between the 3 bureaus, too. You can learn more about the differences here.
Steps to Improve Your Credit Score:
So, how can you improve your credit score? Focusing on the following actions will help your credit scores improve over time. Remember, a credit score reflects credit payment patterns over time, with more emphasis on recent information.
#1 Pay Your Bills on Time
When lenders review your credit report and request a credit score for you, they're very interested in how reliably you pay your bills. That's because past payment performance is usually considered a good predictor of future performance. You can positively influence this credit scoring factor by paying all your bills on time as agreed every month. Paying late or settling an account for less than what you originally agreed to pay can negatively affect credit scores.
Tip: Use resources and tools available to you, such as automatic payments or calendar reminders to ensure you are paying your bills on time.
#2 Pay Off Debt and Keep Balances Low on Credit Cards & Other Revolving Credit
Another important number in credit score calculations is the credit utilization ratio. This is calculated by adding all your credit card balances at any given time and dividing that amount by your total credit limit.
For example, if you typically charge about $2,000 each month and your total credit limit across all your cards is $10,000, your utilization ratio is 20%.
To figure out your average credit utilization ratio, look at all your credit card statements from the last 12 months. Add the statement balances for each month across all your cards and divide by 12 and that is how much credit you use on average every month.
Lenders typically like to see low ratios of 30% or less, and people with the best credit scores often have very low credit utilization ratios. A low credit utilization ratio tells lenders you haven't maxed out your credit cards and likely know how to manage credit well.
Tip: You can positively influence your credit utilization ratio by paying off dept and keeping your credit card balances low, as well as becoming an authorized user on another person’s account (as long as they use credit responsibly).
#3 Apply for and Open New Credit Account Only as Needed
Do no open accounts just to have a better credit mix – this will most likely not improve your credit score. Unnecessary credit can harm your credit score in multiple ways, from creating too many hard inquiries on your credit report to tempting you to overspend and accumulate debt.
#5 Don’t Close Unused Credit Cards
Keeping unused credit cards open—as long as they're not costing you money in annual fees—is a smart strategy, because closing an account may increase your credit utilization ratio. Owing the same amount but having fewer open accounts may lower your credit scores.
#6 Don’t Apply for too Much New Credit, Resulting in Multiple Inquiries
Opening a new credit card can increase your overall credit limit, but the act of applying for credit creates a hard inquiry on your credit report. Too many hard inquiries can negatively impact your credit score, though this effect will fade over time. Hard inquiries remain on your credit report for 2 years.
#7 Check Your Credit Reports and Dispute Inaccuracies
Make sure to check your credit reports at all 3 credit bureaus (TransUnion, Experian, and Equifax) for any inaccuracies. Having incorrect information on your report can drag your scores down. It’s important to verify that the accounts listed on your reports are correct. If you see errors, dispute the information.
Bottom Line: It Takes Time!
Overall, time is your friend in improving your credit scores. There is no “quick fix” for bad credit scores. The length of time it takes to rebuild your credit history after a negative change depends on the reasons behind the change.
Start improving your credit by checking your FICO® Score and reviewing the individual factors that could be affecting your credit scores.
If you have more questions or need more help with credit repair, reach out today. We are here to help guide you in the right direction.