Why Should You Improve Your Credit Score?
Most banks and financial institutions use “The Fair Isaac Corporation” (better known by its simple acronym, FICO) to determine the creditworthiness of their potential borrowers. The FICO credit scoring system plays a huge role in determining whether or not you get a credit card or any kind of bank loan.
So how does FICO come up with your credit score? This is actually a trade secret known only to FICO. To complicate matters further, many banks also use their own scoring system along with a FICO score. In short, it’s not possible to know exactly how a bank creates your credit score.
However, there is wide agreement among credit professionals about what variables banks use to calculate your credit score and – more importantly, how you can use those variables to improve your credit score.
What is a credit score?
A credit score is a simple number based on many variables that banks use to determine your creditworthiness.
According to FICO’s website, 35% of your credit score is based on your payment history, 30% on your credit utilization, 15% on your established history and 10% on the inquiries done by lenders when you request a new loan.
The median credit score is 723. Banks consider credit scores above 723 to be “good” and credit scores below 600 to be “bad”.
9 Great Ways You Can Improve Your Credit Score
1- Make sure your credit history is accurate. Each year you can order a free credit history report from AnnualCreditReport.com. While it won’t show your credit score, you can check it for errors that can hurt your score.
2- Do everything you can to make a full credit payment. If you can’t fully meet your monthly payments, talk to your creditors immediately. They may be able to reduce your monthly payments to an amount you can manage. Your creditors, in most cases, will work with you: they don’t want to see you fall behind in your payments anymore than you do.
3- Do everything you can to make a credit payment on time. A late payment can hurt your credit score and you can incur late penalties to boot.
4- Lower your credit utilization ratio. Your credit utilization is the ratio of your debt (credit card balances) to your totalavailable credit limit. For example, if you have a credit card with a $10,000 limit and a balance of $5,000, your credit utilization is 50%. A high credit utilization can hurt your credit score. A simple way to improve your credit score is to increase your credit limit. This lowers the ratio. Of course, a better way is to lower your credit utilization by lowering your debt. Aim for a credit utilization ratio of less than 35%. This will significantly increase your credit score. If you can’t manage to get it that low, try for at least under 50%.
5- Build your credit history. Everything else being equal, the longer your credit history, the better your credit score. Your use of credit over time displays your reliability as a borrower.
6- Have the fewest number of credit cards possible. One strategy for lowering a credit utilization ratio is to increase one’s credit limit by getting new cards, but this trick can backfire. When you apply for a new credit card, your lender requests your credit score, and this inquiry will appear on your credit report. Too many inquiries can hurt your credit score. Opening many new accounts rapidly will also lower your average account age, causing a drop in your score.
7- Don’t close open accounts that still carry a balance. Of course, there are circumstances where you have to, but be aware that it can hurt your credit score. However, closing unused cards can raise your credit score in the short term.
8- Having different types of loans can help your credit score. Having a history of managing different types of credit accounts can help your credit score.
9- Think outside the box: consider non-traditional ways of building credit or improving your credit score. FICO now has an expansion score that takes into account non-traditional sources of credit information such as utility bills payment history and participation in payment plans. Often overlooked is peer-to-peer (or person to person) lending. This type of lending can have several advantages, not the least of which is offering you a lower rate!
Peer Lending. A Smarter Way to Borrow Money.
If you need a loan but your bank’s interest rates are too high, consider applying for a peer to peer (person to person) loan on Peerform.com. While the average interest rate for personal bank loans are over 14%, we offer interest rates starting at below 6%, and you can borrow anywhere from $1,000 to $25,000.