How To Improve Your Credit Score
Have you ever tried to apply for a loan but were turned down due to a poor credit score? This frustration is the reality for many consumers in today’s economy. Your credit score is one of the first pieces of information a lender will look at before offering you a loan. While a good credit score won’t guarantee that you qualify for a loan, a bad credit score almost certainly will keep you from getting a loan (or at least one you can afford). The truth is, prospective borrowers with low or subprime credit scores will generally qualify for a lower loan amount, receive a higher interest rate, and be required to put down a larger down payment than a borrower with a good credit score. For all of these reasons, it’s important to both keep an eye on your credit score as well as proactively try to raise your score.
What is a Credit Score?
Your credit score is a 3-digit number that lenders will use to determine your credit worthiness. While there are many different credit scores out there, the FICO score is generally the most-widely used. Your FICO score takes into account the history on all of your credit accounts. A complex algorithm then scores your credit profile in a range from 300 to 850. Many financial institutions will classify any credit score under 670 as subprime, meaning you are less likely to repay the loan.
5 Ways To Improve Your Credit Score
1) Know Your Credit Score
The first step to improving your credit, is to know your credit score. This seems obvious, but many consumers are unaware of their troubled credit until they apply for a loan. Knowing your credit ahead of time gives you the opportunity to improve your score before you need to take out a loan. Many lenders today offer free credit scores on credit accounts, or you can check your credit for free on sites like freecreditreport.com.
2) Check and Resolve Problem Accounts
Many credit issues are easy to diagnose. Your credit report will show the primary issues impacting your score. Often, a low credit score results from a non-payment of a prior loan or credit product. If you have neglected a payment in the past, your lender will send this information to the credit reporting bureaus and your score will take a big hit. Resolving a problem account is the first step you should take to improving your score. Work with your lender to pay back the owed amount. Often, lenders will sell troubled debt to collections agencies. Generally speaking, you may even be able to negotiate a lower payment than the amount you originally owed.
3) Pay Your Bills On Time
Many people do not know, but monthly bills such as phone or utility bills are generally offered to you on credit. This means you aren’t required to pay the bill until the end of the month, once you’ve already used their services. While this is generally a good thing, it also means that a non-payment of a bill will be sent to the credit bureaus and can negatively impact your credit score. Paying your bills on time will not only keep your credit score from falling, but a long history of on-time payments will help to improve your score.
4) Pay Off Debt and Keep Low Balances
One of the most important calculations for your credit score is called the credit utilization ratio. This ratio takes into account how much of the total credit offered to you that you are using. Let’s say you have a couple of credit card accounts with a total limit of $10,000. Your utilization ratio is how much of that $10,000 limit you have outstanding. Lenders use this ratio to determine how good you are at managing your credit. It is widely recommending to keep this ratio below 30% and lower is better.
5) Don’t Close Older Accounts
The length of your credit history is another key component of your credit health. The number of years you’ve maintained your credit accounts shows lenders that your credit is established. Banks are more willing to lend to someone who has paid all of their credit accounts on time for 20 years than someone who just opened their first account recently. While many consumers will want to close old credit card accounts in favor of new ones, you must be sure that you aren’t negatively impacting your credit history. As long as the credit card is not charging you an annual fee, it is best to leave your old accounts open or you risk harming your established credit.
Thanks for reading our article on ‘How To Improve Your Credit Score’. At Glenn’s Freedom, we know that some of our customers face troubled credit that can keep them from buying a car. We work directly with several financial institutions to make sure we get you in the vehicle you want at a payment you can afford. If past credit issues have kept you from buying a new car, stop by our dealership at 1560 E. New Circle Road in Lexington, KY and let us help you get back on the road again!