Mastering Credit Scores: Improvement Strategies and Debunking Myths
Understanding the Importance of Credit Scores
When it comes to making financial decisions, modern society has increasingly become more reliant on using credit cards. From simple things such as buying lunch to significant choices like purchasing new appliances and electronics, people have been leaning more on credit to get what they want. Let’s know more about how to improve your credit score and credit myths debunk
Each individual has their own credit score, and having a good number generally means you can easily secure loans, rentals, and insurance. With a higher score, you can often benefit from better deals as well.
Wondering how to improve your credit score? Continue reading to find out.
Practical Strategies for Improving Your Credit Score
Your credit score is a direct indication of whether or not you can be trusted as a borrower. A high score means you are considered to be a low-risk borrower while a low score means the opposite.
The three major credit bureaus of Experian, TransUnion, and Equifax created scores that can range from 300 to 850 for each person. A score of 700 and above is considered ideal and can help you apply for better deals.
There are best practices you need to follow, so you can improve your credit score. These include:
Best Practice #1: Paying Your Bills Promptly
One of the most important tips you can follow to increase your credit score is to pay your utility bills on time. According to an Experian report, having a payment history that shows timely payments is a huge factor when determining your credit score.
It’s a common practice for lenders to go through your payment history to see how good (or bad) you are in terms of borrowing. Having a well-established history of paying promptly often indicates that you’ll manage your future debts well.
John Ulzheimer, a credit expert who used to work for Equifax adds, “You want to avoid things like late payments, defaults, repossessions, foreclosures, and third-party collections. Anything that would indicate non-performance of a liability is going to harm your credit score.”
Best Practice #2: Reducing Your Credit Utilization Rate
Another tip on how to improve your credit score is to minimize your credit utilization ratio. This is because FICO — a pioneer in developing credit scores — calculates 30% of one’s score according to the “Amounts Owed” category, and the metric plays a key part here.
It’s important to assess your balances and make sure you’re not going past your credit limit. According to Ulzheimer, maintaining a utilization rate of 10% or below is ideal, as a higher ratio often means fewer points and lower scores.
“I always default to 10% because that’s going to keep you in the good zone of scoring platforms,” Ulzheimer says.
Best Practice #3: Keeping Your Old Accounts Open
It’s normal to feel the need to close down an old account after finally paying off a loan. It could be that you want to wipe some of the bad records that you incurred or simply want to have closure after many years of being in debt.
However, experts recommend keeping these accounts open, particularly when you’ve been making your payments on time. This is because your debt records can improve your credit score. Lenders can also use it in case they need to do a short background check on your reliability.
Nancy Bistritz-Balkan — an executive at Equifax — states, “Closing an account isn’t something that consumers should automatically do in the hopes that it will positively impact their credit score.”
She further mentions that an account that has a lengthy history of always paying on time is one of the main things creditors and lenders want to see.
Try to keep your credit card account around since closing it can reduce your maximum credit limit. Negative records shouldn’t be a problem since these reports will be automatically wiped away over time.
Ulzheimer says that bankruptcies can take up to 10 years to stay in a credit report while repossessions, collections, settlements, and foreclosures can last up to seven. If you’re wondering how to improve your credit score easily, keep your old accounts open.
Best Practice #4: Applying Only for Credit You Need
You’ll get a hard inquiry applied to your report each time you apply for a new line of credit. This type of inquiry will temporarily lower your credit score, which is why you should only apply for the credit you need.
A single hard inquiry won’t affect your score much, but several of them will. Having a string of these all at once can significantly bring down your score, which is crucial since the temporary reduction can last up to 12 months.
That’s why you should avoid applying for a new line of credit if you only want to see whether you can get approved or not. Instead, you can do your own research to see if you’re an ideal candidate and how high your chances are of being accepted.
Best Practice #5: Leveraging Programs That Boost Credit Scores
Did you know that the number of accounts you own and their average age overall both play an important part in determining your credit score? People who have a lengthy credit history have more of an advantage compared to those with a limited record.
Fortunately, there are programs you can apply for to boost your credit profile. Experian Boost and UltraFICO are two of the most recommended choices by experts.
For Experian Boost, users can connect their digital bank account information to let the credit bureau include their bill payment histories in their reports. Meanwhile, the UltraFICO program lets you add your banking data, so it will be added to your report and your credit score.
Debunking Common Credit Myths
Although knowing how to improve your credit score is important, it’s also essential to be aware of the activities that have no effect on them.
Here are several actions you can take that will not impact your credit score:
- Using a debit card to pay: Instead of a credit card, using a debit card to buy items and services normally won’t affect your credit history or your credit scores. The same can be said for prepaid debit cards, which allow you to purchase items with a specific amount of money that’s already included in the card.
- Income changes: It may come as a surprise to some that income isn’t included in credit reports. When you experience changes in this matter, you shouldn’t be worried; it doesn’t have an impact on your credit scores.
- Checking your credit reports: Pulling a credit report leads to a “soft inquiry,” which doesn’t have an effect on your credit score. You can view your files with nationwide credit bureaus as much as you like without having to worry about any score reductions.
- Getting married: Your credit score won’t be merged with your spouse’s after you get married. If you or your spouse has bad credit, you might have a hard time getting a joint loan, but this doesn’t affect your own credit history.
- Paying small companies: The money you spend on local services from small businesses like pest control and lawn care isn’t typically added to your credit report. Credit bureaus are strict when it comes to their requirements, and many small companies are normally not covered by them.
How To Increase Credit Score Quickly?
While we’ve listed out ways to improve your credit score, you may be wondering if you can increase it quickly. To be clear, there’s no single approach that will quickly increase your credit scores. However, there are some additional steps you can take to boost your score in a short amount of time.
- Paying twice a month: Rather than making a huge payment once a month, you should try to split it up into two smaller payments instead. This approach helps add a few extra payments every year, hopefully resulting in raising your scores as quickly as possible.
- Request a credit limit increase: Asking for a higher credit limit is another potential way to improve your credit scores. Having a higher limit decreases your chances of going over it, reducing its ratio significantly.
- Resolve errors in your credit report: Another way you can potentially increase your credit score quickly is to resolve credit report errors. Disputing any of these issues immediately can get them removed, allowing your scores to adjust correctly.
Conclusion: Taking Control of Your Credit Score
Earning the ideal credit score is essential if you want to take advantage of better rates and services. However, those who have a bad record can still change and improve their standings. We hope that we were able to cover how to improve your credit score and credit myths debunk. Let us know if you have any questions that we didn’t cover
Making payments on time is still one of the best ways to have a good reputation with credit bureaus. By following the tips provided above, you should already have a good idea of how to improve your credit score.
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