Best Practices to Improve Your Credit Score & Interest Rate Pricing
Created On April 22, 2022 - Updated On: July 14th, 2022 by Stephanie Jones
The best way to improve your credit score is to follow the best practices listed below for raising and then maintaining, a high credit score.
A good credit score can benefit you in many ways; people with strong credit have access to a wider variety of financial options, an easier time getting a loans or credit cards and enjoy the best rates of interest on all financing products. Credit scores act like a financial report card, reporting historically on your management of debt obligations from student loans, credit cards to mortgages and solar leases.
Multiple approaches to credit management can be advantageous in the long term; here are some best practices
Pay all Obligations as Agreed
Regardless of the financing instrument; credit card, department store card, mortgage, student debt, auto loan or other installment debt; pay the obligations when due. Late payments, especially those on the largest debt obligations with payments over 30 days past due, can have a bad effect on your credit score. And the more recent the late payment, the worse the effect on credit. Pay your bills as agreed, and if there are any late payments call the creditors directly and try to reverse the late payment notice on your report.
This figure is the ratio of revolving credit balances to available credit and plays a major part in credit score calculation. For instance, if you have total available credit facilities of $100,000, and you are using $30,000, your credit utilization ratio is 30%. Improve your credit score by lowering your credit utilization ratios but note; if you close credit lines with a zero balance, your utilization ratio will rise!
Don’t Close Credit Cards
Credit scoring formulas factor in the length of your credit history; credit histories of twenty years or more are favorable. Keep credit cards open, even if they’re rarely used, to improve your credit score.
Become an Authorized User
Becoming an authorized user on someone else’s credit card account can help, there are generally no credit requirements to be added as an authorized user, making this an easily accessible option to users who are just getting started. Just make sure the account you are joining pays their obligations as agreed!
Credit Limit Increase
A higher credit limit will positively affect your credit utilization ratio, a key component of your credit scores. You can usually request a credit limit increase by calling the customer service department of the issuing creditor. They usually just want to know your salary and monthly rent or mortgage expense, they will then advise you on any increase (or decrease) to the credit limit on the card.
Identify and Resolve Credit Reporting Errors
Most errors on credit reports have an adverse effect on credit scores, even if they’re only on one credit bureau’s report. Some items such as Collection Accounts, and Charge Offs can have a very damaging effect on credit scoring, correcting these will have a positive effect immediately and, to get an error corrected, contact the original creditor to get the item removed from your credit report.
We suggest you check your credit only through one of the three credit bureaus: Equifax, Trans Union or Experian. For instance, you can get your free Equifax report in a variety of ways, all lined out for you here.
Be wary of soft credit pulls offered via credit agencies or banks, they often distort the true picture. What you want are formal & complete credit pulls, including the reporting data from all three of the credit bureaus, done only infrequently, such as annually.
Diversify Credit Obligations
The variety of accounts types you have, for instance, home loans, auto loans and credit cards can positively affect credit scores.
When a lender pulls your credit for a loan application, especially for mortgage financing, once or twice within a short period of time, it will not be damaging to your credit score. However, multiple inquiries for credit cards or installment loans can adversely affect your credit (4 or more report requests). Learning about your loan options and terms before allowing a lender to pull your credit, be watchful of inquiries, get terms in writing first, before you allow a credit pull!
Use it or Lose it!
Having at least one installment or mortgage account, along with at least one credit account (or more), is healthy for your credit. Note, we only suggest using credit as you can pay it in full each month, but whatever amount you can charge, this usage will help your score. If one were to have no installment or mortgage accounts and never charge anything on credit, your scores could drastically go downward or even not be reported if enough time passes.
There are 3 credit repositories responsible for credit scoring in the financial markets; Equifax, Experian and TransUnion. If there is enough credit established, the repositories will return a credit score when your credit report is ordered and reflect a risk score referred to as Beacon, Fair Isaac and Fico respectively. Mortgage Lenders use the middle of the 3 scores or the lower of 2 scores (if only 2 scores are returned), and if there are 2 borrowers on a transaction, the lowest middle score of the 2 are used.
Maintain best credit practices over time and make smart financial decisions and your credit scores will rise to the top and stay there. You’ll be surprised just how much better the rates and costs will be for loans & financing products that you apply for when your scores are higher.
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