If you didn’t already know, your credit score is essentially a number tracking the shape of your finances. With one look at that number, lenders will know whether they want to offer you a loan or show you the door. With a higher score, you’ll find it easier you’ll find it to get credit. Also, with a better credit score, lenders will offer you lower interest rates on the amount you borrow. Here are top tips to boost your credit from an income strategist.
Know the five factors influencing your credit score
Basically, your credit score measures how responsible you are with money. Most lenders consider five factors to ascertain your rating. In order of importance, these factors include:
- Payment history
- Credit usage
- Age of credit accounts
- Credit mix
- New credit inquiries
To know how to improve your credit, you need to know what factors influence your score. Keep in mind they’re not weighted equally.
Weighted at 35%, Payment history packs the biggest punch to your credit scores. Paying your bills on time is absolutely essential for good credit. Unfortunately, late payments leave a mark on your score for up to seven years.
Credit usage, the second most important factor, amounts to 30% of your score. Credit usage looks at how much credit you have available and how much you are currently borrowing. Keeping that amount less than 30% is optimal.
Length of credit history impacts your score by 15%. The formula considers the average ages of all your credit accounts and your oldest and newest accounts. The longer your record of good credit, the better.
Your credit mix weighs 10% on your credit score. The credit mix examines the types of credit you borrow and favors diversity. Lenders want to see different lines of credit, including credit cards, mortgages, and student loans.
Your recent credit also affects your score by 10%. Recent credit means any applications you file for new lines of credit. The fewer, the better.
Now that you’re familiar with the factors influencing your credit, let’s look at ways to increase your score. There’s no immediate solution for bad credit or over spending on credit cards, but here are a few tips that may help boost your score.
Check your credit score for errors
Seventy-nine percent of credit reports have errors that can lower your score. You should check your credit score regularly to stay up to date on these, but be careful. Make sure you check your credit through soft inquiries to avoid being dinged.
Most banks provide free credit monitoring for their clients. Enrolling in this service will enable you to receive alerts whenever your score changes.
If you find mistakes when checking your credit score, you can file a dispute with the credit bureau. If the bureau approves your dispute, they may correct the error within the month.
Remove derogatory items from your credit score
A derogatory credit item is a negative report on your credit. Statements from lenders saying that you paid bills late or defaulted on a loan let other lenders know you have had trouble managing your finances and may be a borrowing risk.
Derogatory items affect your credit score in different ways. For example, forgetting to pay your mortgage on time one month won’t hurt you as much as foreclosure or bankruptcy. However, failing to pay several bills on time shows a pattern, and this does impact your credit score substantially.
Derogatory items can haunt your credit score for a long time. A bankruptcy can remain on your credit for ten years. Other statements, including late payments and debt collection, stay on your credit report for seven years.
You can dispute an error or outdated derogatory item with the credit bureaus to have it removed from your credit report. It’s in your interest to pay off derogatory credit items that remain on your credit report. While paying these items off won’t remove them from your report, it will show that you’ve paid off the balance.
Ask for a credit limit increase
Requesting a higher credit limit is another way to boost your credit score. This strategy works because the higher limit reduces your credit utilization ratio. It will only work if you maintain–or better still–lower the amount you are borrowing.
Stop applying for new credit
Don’t apply for new credit cards. The new hard inquiries on your report make you appear to be a borrowing risk. Saving a few bucks by signing up for another store’s credit card in the checkout line isn’t worth the amount you’ll pay in higher interest when your score dips.
On the other hand, if you have recently opened a new credit card, don’t cancel it. Closing the card will hurt your length of credit history. The best plan of action is to pay it off and put the card out of your mind.
Building excellent credit takes time and discipline, but these tips may help you boost your score. Take action to improve your score by checking for errors, disputing derogatory items, paying off credit cards with high balances, and requesting a higher credit limit. After that, be prepared to establish responsible financial habits and maintain them over the long haul.
This article was submitted by Jasmine McCall