How to Improve Your Credit Score Fast?
In today’s consumerism driven world, most people at some point will need a credit card, a mortgage, or some kind of financial assistance from a bank or a financial institution. In case of bad credit score or no credit score (in case you do not own a credit card or any other type of loan from a bank), getting credit is tough.
Though numerous factors influence your eligibility for a loan or credit card, the credit score is one of the most important of those factors. And it can make or break your chances of being approved for a credit card, loan, utility services, auto insurance or renting a home of your choice.
In essence, maintaining a good credit score is critically important. If your credit score is low, take these steps to improve your credit score fast.
What is a credit score?
Your credit score is the yardstick for banks and lenders to decide if you should be given that credit card or loan. It typically varies between 300 and 850. Anyone with a score lower than 300 has bad credit. Your credit score helps lenders determine your probability of paying off a loan. There is a lot of talk around about good and bad credit.
Your credit score is the deciding factor whether or not you are approved for a loan or credit card. If you have always paid off your loans and credit card bills on time, then your credit score will likely be good. Else, you will have bad credit, which makes you ineligible for a loan.
If you have never taken a loan or had a credit card, you have zero credit, which will have the same effect as bad credit. Without a credit score, a lender cannot be assured of your ability to make timely repayments. That is why it is so important to maintain a good credit score.
What counts towards your credit score?
Essentially, your credit score is the report card of your credit history. The score is the sum of your payment history, the amount of debt, length of credit, types of credit in use, and new credit. All these factors come together to make your credit score.
The biggest part, almost 35 percent, of your credit score, is your payment history. If you were to lend money to your cousin and knew that he always makes payments on time, wouldn’t you trust him more? Of course, you would. The case with a credit score is no different. Lenders want to be sure that they can trust you and your past payment history is the yardstick.
The next important part of your credit score, almost 30 percent, is the amount of debt you have today. This is measured by figuring out your debt utilization ratio.
For instance, if you have only one credit card with $2,000 available and a debt of $1,000, then your debt utilization ratio is 50 percent. ($1,000/$2,000). The higher the ratio, the lower your score, because it shows that you aren’t responsible with your credit. If you owe $100 out of $2,000, it makes your situation better.
Next comes the length of your credit history, and it accounts for about 15 percent of your score. To determine this, lenders usually look at your oldest account, your youngest account, and your average account. The older your credit accounts, the better your score.
The next 20 percent of your credit score is determined by the types of credit that you use and your newest credit respectively. Types of credit include credit cards, car loans, mortgages, student loans, etc.
Lenders look at both the types of credit you have paid off successfully in the past and the types of credit outstanding at the moment. New credit involves loans that you have just applied for or a credit card that you got a week ago. All of these come together to make up your credit score.
Impacts of bad credit score
No one thinks of credit risk when seeking a loan or making credit card purchases. What we think of is how the purchase or the loan makes our life better by providing us with the things we need or want at that moment. But creditors or lenders don’t care about your purchases or how they improve the quality of your life. They only want the money back, with interest.
Credit risk refers to the possibility of you not paying off your debt. The lower your credit score, the higher your credit risk, and for obvious reasons, it isn’t too favorable to lenders.
Bad credit has a big impact on not only your finances but your quality of life in general. Some of the ways bad credit negatively affects your life are:
Difficulty getting approved for a loan
Your likelihood of getting approved for a loan or a credit application is directly dependent on your credit score. The lower your score, the less likely you are a lender who is willing to approve you.
Each lender has their own quality level cutoffs, and if you fall below that level, you will most likely not be approved for the loan. For instance, there isn’t much difference between the credit score of 698 and 700, but to lenders, those two points make a big difference.
Higher interest rates
Even if you do manage to secure a loan, the interest rates will be higher than normal. This is because lenders see your credit risk as high with less possibility of paying off the loan. With a good credit score, you are not only able to secure a loan easily, but lenders may also lower the interest rates because they trust you to make timely payments.
Higher insurance premiums
Auto and home insurers almost always look at your credit unless the law in the state explicitly forbids it. This includes timely payments and outstanding debts. Bad credit could mean higher insurance premiums.
Difficulty getting a job
Even though there is hardly any relation between credit and job performance, employers are very likely to check your credit score during the hiring process, unless you are in a state where the practice is banned. A poor credit score could have you rejected even though you were a good fit for the position, and also make it hard to get a security clearance.
Trouble renting an apartment
For a fact, landlords with good apartments in desirable neighborhoods often run a credit check as compared to those who have shabby apartments in substandard neighborhoods.
This is because well-kept apartments in good localities get tenants very easily and in large numbers. Applicants with lower credit scores are not favored because they are less likely to make timely rent payments.
If you have a poor credit score, you may end up in a cramped apartment in a down market neighborhood, because those landlords don’t check credit history. This, of course, doesn’t apply to regions where the practice is banned.
How to improve your credit score fast?
Your credit score is much like your weight. In fact, it has been found in a survey that more people would be embarrassed to admit their credit scores than admit their weight. And quite like losing weight, improving your credit score takes time and effort.
To lose weight quickly, people usually go for crash diets, but they usually don’t work and are also unhealthy.
However, it is indeed possible to improve your credit score fairly quickly. Keep in mind, though, that any change could take up to 60 days at least, but it’s better than doing nothing about your weight and sitting there eating French fries and watching TV. Much like losing weight, for improving your credit score, you need to take action.
The following steps can help you improve your credit score with time, diligence, and patience.
1. Check your credit reports
The first step you need to take is to order a copy of your credit report from all three This is because unless you check your credit report, you won’t know where improvements need to be made. The reports may not always be accurate either.
In fact, there are several instances when credit reports contain mistakes, and as a result, the credit score dips. Therefore, you must first determine the accuracy of your credit reports. You may also take the help of a professional to help you check the reports thoroughly.
2. Point out errors
The first thing you should check in your credit report is if all your payments have been reported. If you find any payment missing, then you must hold your creditor accountable. There are other errors, besides wrong credit reporting, that can affect your credit score. For instance, if someone else has stolen your identity and is abusing your credit, it will affect your credit.
In fact, credit identity theft is a common issue that has been faced by several people, thanks to the rising number of Internet threats.
Creditors asking for purchases you never made or received a tax notice from a job you never had are all cues that your credit is being abused by someone else. If you suspect fraud, you must immediately talk to your financial institution or creditors.
Other errors include reporting of an old collection account, unpaid bills, and your credit information getting mixed up with that of someone else with the same name. Again, you may seek the help of a professional to guide you in figuring out the errors in your credit report.
3. Fix the late payments
Most people with bad credit score have unpaid bills from days or weeks ago that were never taken care of. Unfortunately, these late or delayed payments are a blemish on your credit report, and there’s no other way than to pay them off. People think that closing an account gets rid of unpaid bills, but it isn’t so.
Even closing the account won’t get rid of late payments. As long as the late payments remain on your credit report, your credit score will not improve. Before you do anything else to improve your credit, the late payments must be fixed.
The best option is to set payment due date alerts so that you don’t miss the dates. Many banks offer payment reminders through their websites, which involves sending you an email or text message to remind you when a payment is due.
You can also get your payment schedules organized around a more convenient time, for better chances of remembering them.
4. Negotiate with the creditors
Remember that your entire credit history is on record, so you cannot deny that you had stopped making payments on a credit card bill after you lost your job. What you can do is ask creditors to remove that or any other debt that went to collection. Be careful about this negotiation and do all of it in writing to have proof later.
Write a letter to your creditor with an offer to pay the remaining balance if they will report the account as “paid as agreed” or erase it altogether. Get the creditor to agree in writing before you make the payments.
There’s also something called a “goodwill adjustment” that you can take advantage of. For instance, if you were a good MasterCard customer until you lost your job, you could write a letter to the company, emphasizing your good history in the past, and ask that the late payments be removed from the credit report. In many cases, this could happen.
5. Reduce your debt
Although this is easier said than done, reducing the amount of money that you owe can go a long way in not only improving your credit score but also giving you satisfaction. The first thing to do to be able to achieve is to stop using your credit cards.
By using your credit report, note down the accounts that you have and then check how much you owe on each account and what the interest is on each. Next, you need to come up with a solid plan that uses your available budget first to pay off the highest interest cards, while continuing to make minimum payments on the other accounts.
6. Get a credit card
Having one or two credit cards will actually improve your credit score over time, as long as you don’t charge too much and pay your bills on time. Responsible users of credit have several benefits to reap from owning a credit card or two.
If your credit score is good or excellent, you will be approved for any credit card. But if you have bad credit, getting a traditional card can be difficult. In that case, you should try for a secured credit card.
These credit cards have a restricted spending limit. For instance, if you open a checking account and put $500 in it, you get a line of credit for $500. Make sure to choose a secured card that reports to all three major credit bureaus.
If you have never had a credit card, then an account mix up could also be responsible for the errors on your credit report. Getting a credit card could fix the problem. But what should you do if you cannot get either traditional or secured credit cards? That takes us to the next point…
7. Become an authorized user
If you cannot get approved for either a secured or a traditional credit card, there is a third option.
This involves convincing a family member or friend for being added to their existing credit card account. Remember this is the question of money, so if you’ve had a wonky financial history, it shouldn’t be surprising to hear “no” a lot. In some cases, you might also be in luck, particularly if you are young with no poor credit history.
If you do manage to convince someone to add you to their account, you should then offer to make an agreement in writing, putting down how much you can spend and how you will divide the bill. Once this is sorted, you must be responsible and use the card wisely.
You shouldn’t spend more than you can afford and make sure to do your part when the bill is due. Leaving your co-signer hanging will not only affect your credit score but also make your relationship bitter.
8. Reduce your spending
Improving your credit score doesn’t mean you keep using your card for every little thing. Remember the credit utilization ratio? The lesser it is, the better off you are. Ideally, it should be no more than 30 percent. The best ratio is 10 percent.
Once you achieve that ratio, your credit score will be up to the mark. But for that to happen, you must reduce your spending and underuse your cards. Yes, that’s right. For instance, if your Visa card has a $2,000 limit and you routinely charge a $1,500 a month, it makes your credit utilization ratio higher than 50 percent.
It doesn’t matter if you always make timely payments. What matters is that the credit bureaus think you are a spendthrift who lives off of his credit cards. It paints a poor impression of you and your credit. But if your utilization ratio is high because your credit limit is low, then this leads to the next item.
9. Raise your credit limit
If your credit limit is low, talk to your creditors about increasing it. For example, if the limit on your MasterCard is $2,000, you could have it increased to $3,000. Be careful about raising your credit limit, because it works only if you are responsible enough to keep your spending under control. Else, you will be back to using 70 percent of your credit each month, and your credit will only dip lower.
10. Limit credit applications
We know it can be tempting to sign up for the store credit card for the 20 percent discount, but remember that it affects your credit score negatively.
For every card that you sign up for it costs you three to five points off your credit score, and if you already have bad credit, applying for lots of credit offers in a short time will only damage credit score even more.
Similarly, credit checks also negatively impact your credit. If you find that a hard inquiry was placed on your credit file without your knowledge, make sure to contact the lender and find out what it is all about.
If you still have no knowledge of the inquiry, it might be fraud or identity theft and requires alerting the credit bureaus. Although it takes time, the hard inquiry can be removed from your credit report. On the other hand, soft inquiries don’t impact your credit score, because they are generally done by a lender as part of a background check.
11. Pay your bills on time
Remember the elements of a credit score that we discussed earlier you’re your payment history, including late and missed payments form the biggest chunk of the score – 35 percent. If you forget to make your payments on time because you’re too busy, absent-minded, or too overwhelmed with young children, then please automate your payments. But you know what’s even better than paying your bills on time? Paying twice a month.
Yes, that’s right. If you use almost your entire credit limit, it harms your credit score. Suppose, your limit is $2000, and you end up spending $1,800 because of unforeseen expenses. Even if you pay in full by the 15th of the month, it still involves maxing out a card.
The better option here is to make one payment just before the statement closing date and the second payment before the due date. While the first payment will most probably trim down the balance that the credit bureaus see, the second one makes sure you don’t have to pay late fees.
It may not be as quick as you want, but improving your credit score is completely possible with some discipline and effort. And in some cases, making your credit score good could turn out to be easier than shedding those extra inches!