Your credit score is the standardized way the financial world measures your financial responsibility. The more they determine that you are liable, the less risky you seem and therefore the less interest you will usually have to pay. In short, your credit score helps determine the cost of your financial living.
What are the benefits of a good credit score?
1) It can reduce interest rates on personal loans, mortgages, credit cards, and auto loans.
2) It can reduce the rates of insurance policies.
3) It can eliminate the need for large security deposits or down payments.
4) It can help you get hired for the job of your dreams.
How Can You Transform Your Credit Score?
The two areas that will give you the most bang for your buck are your payment history and amounts owed. Together they typically make up 65% of your score. Here are three simple steps you can take to boost your credit score and keep money in your pocket.
Your credit improvement checklist:
- Review your credit report and correct any errors and inconsistencies.
- Stay up to date and pay your bills on time by putting them in automatic mode.
- Use less than 30% of your credit limit
1. Examine your credit report and correct any errors and inconsistencies. This step has the potential to positively impact your FICO score across the board!
Your action steps:
- Get and review your credit report every year for free by going to annualcreditreport.com. You can access your credit report with the three credit bureaus: Equifax
, Experian and Transunion
- Once you’ve accessed each report, save it, review it carefully, and note any errors, omissions, or inconsistencies.
- Then dispute these errors online, over the phone, or by mail. (The online process is considerably the fastest!) Note that each agency typically has up to 30 days to investigate and respond to your dispute, otherwise it must be removed from your credit report.
- Sign up for a free credit monitoring service. There are a lot of services out there, but I think Credit Karma and Credit Sesame are great options for tracking and monitoring your Vantage score and even helping you spot fraud. To get your free FICO score (which is still used 90% of the time for loan decisions), you can take advantage of Experian’s free FICO score report service or the credit score service of your bank, lenders and credit card providers.
2. Pay your bills on time. (~ 35% FICO Score Weight): Payment history helps determine your track record of reliability. As you can see, this is usually the most important weight in determining your credit score. Your payment history stays on your credit report for up to seven years, so it’s critical that you take the necessary steps to update all of your accounts and pay every bill on time.
How to run:
- Be aware of all payments due. Take one more step to call the creditor and confirm the amount owed. While you have them on the phone, say your goal is to improve your credit score and ask that any past late payments be removed from your report. A little heart-to-heart can go a long way, and it’s a win-win for you and the creditor (who just wants to get paid).
- Set up automatic bill payment for all your monthly obligations. Even if you think you can only make the minimum payment, it is ALWAYS better to make the minimum payment than a late payment. Putting these things on automatic will ensure that your payments are made on time.
- If you’re worried about overloading your account, take the extra step of creating a separate checking account for your monthly bills and automatically deposit what you need to meet those obligations each month.
3. Use less than 30% of your credit limit (~ 30% weighting). It is another heavyweight in the credit score. Creditors want to see that you are using your credit without wearing yourself out. A good rule of thumb is to limit the use of your credit to less than 30% of your credit limit. Ideally, you want this number to be as close to zero as possible.
Your action steps:
- Focus on paying off your credit balances using as much credit as possible. This will allow you to have the greatest impact on reducing this number of important uses. When I did this I increased my score by 50 points over a 6 month period.
- Apply for an increase in the line of credit. If your account is in good standing, you can often get approved for line of credit increases, which generally improves your use of credit. As you improve your credit and keep your accounts in good standing, it may be a good idea to request an increase in your credit limit every 6 to 12 months. I also suggest that when contacting your creditor, confirm whether the credit report they are using can be a soft pull versus a hard pull. Strong pull can have a negative impact on your credit score if you have had several new inquiries on your credit report in the past 24 months.
- Consider consolidating your debt. It’s a way to take control of your debt, lower your interest rates, and reduce your use of credit. You can use a site like Credible to compare prices. Disclaimer: BEFORE you do this, make sure you are able to not add any additional debt. This means being confident in how you manage your expenses / cash flow, having at least $ 1,000 to $ 2,000 or more for emergencies, and having a plan to pay off your high interest debt (and high interest rates). activate automatically!).
Prepare for success and reap the rewards
If, like many of us, it can take a long time to start or continue, involve a trusted and impartial friend, spouse, family member, or financial professional. With a little help and small incremental improvements like these, not only will you improve your credit and lower your financial cost of living, you’ll be on your way to financial independence too!