Having a good credit score is incredibly important when it comes to your financial well-being. A good credit score means that you will more easily be approved for loans, get higher credit limits, better rates, and much more.
While getting a good credit score can take years, there are many things you can do right now to help improve your credit score.
So let’s jump in!
Credit scores essentially tell a lender how likely you are to pay back a loan that you take out. They also tell lenders how likely you are to pay back that money in a timely fashion. But how exactly do they determine that, and what factors do they consider?
One of the most important factors in your credit score is your payment history. Do you pay your bills on time every month and in full, or do you have a tendency of missing payments here and there and not always paying in full? This history makes up 35% of your credit score.
If you owe a lot of money and are in a good deal of debt, this will affect your credit score negatively. Lenders look at what is called your Credit Utilization Ratio, which compares how much credit you have available to how much debt you are in.
If you have a $20,000 credit limit but owe $15,000, you will have a Credit Utilization Ratio of 75%. But if you have a credit limit of $20,000 and only owe $1,000, you have a Credit Utilization Ratio of 5%. The lower your ratio is, the better your credit score will be. Experts recommend keeping your Credit Utilization Ratio below 30%. How much money you owe makes up 30% of your credit score.
While credit history and your credit utilization make up the majority of your credit score, there are a few other factors that play a role in your credit score.
The age of your loans and lines of credit also affects your credit score. Keeping your accounts active for a long period of time (particularly when they are in good standing) will help give you a good credit score. If you are young and starting out on your credit journey, you will find it hard to get an excellent score because of this. TTha age of your accounts make up 15% of your credit score.
Your credit mix is another factor in your credit score. This refers to the different types of accounts you have. It is good to have a mix of credit cards, loans, mortgages, etc. This accounts for 10% of your score.
The last factor is the amount of new credit you have. If you have accounts that are new, or a lot of credit inquiries, this will count against you negatively. Since they are new, there is not as much of an established track record that you will pay these debts back. This accounts for 10% of your score as well.
Having a good credit score tells lenders that you take your finances seriously and that you are dependable. After all, lenders are in the business of making money, so they want to ensure you will pay them back. Having a good credit score will help with the following:
Lenders will approve you for lower interest rates on credit cards and loans
Lenders will be more likely to approve you
Lenders will give you higher credit limits
Insurance companies will give you better insurance rates
Landlords will approve you for rentals more easily
You will have more negotiating power for loans and accounts
These are all great reasons why you should want your credit score to be as good as possible.
While building a good credit score takes time, there are some things you can do right now to help improve your score. Here are our top 8 tips for improving your credit score.
As we said before, your payment history is one of the most important factors in your credit score. Committing to making on time, consistent payments is the best way to increase your credit score. In just a few months you can see your score improve by prioritizing this.
A new service called Experian Boost can increase your credit score instantly by including account payment histories that are typically excluded from credit score calculations.
But how does this work?
Utility and phone bills are usually not included in your credit score. Experian however looks at your bank account and identifies qualifying accounts that you make timely payments on, and gives you credit for those on-time payments. For example, your on-time Netflix payment would not normally count towards your credit score, but with Experian Boost, it would count positively. And the best part? If Experian finds that you don’t have a good history with these accounts, it won’t count them against you.
Building credit can be very hard, especially in the very beginning. But a new debit card is aiming to change that. The Extra Debit card connects to your existing bank account and your credit limit is based on your bank account balance. Every time you use your card to purchase something, you help build your credit. The Extra Debit card even has perks like a credit card does, like 1% back on all of your purchases.
This debit card pays itself off every day, causing it’s credit utilization to reset every 24 hours. So you essentially have a card that pays itself off with no interest and can keep you below the suggested 30% Credit Utilization Ratio.
Wait – you are probably wondering “does refinancing affect credit scores” – and the answer is yes! A great way to improve your credit score is to refinance your car loan. It’s important to note that this will not instantly raise your credit score (in fact the hard inquiry on your account may temporarily ding your score). But refinancing your car loan can help you out in the long run.
First of all, when you refinance you may be eligible for a lower APR than you are currently paying. This will save you money in interest.
Refinancing will also allow you to change your payment schedule and adjust how much you are paying every month. If you are consistently tight with cash, freeing up money every month can make a significant difference in your budget and can help you pay off existing debt.
Find out how much you could save with a free, instant quote (no credit check required!) from Auto Approve today.
If there are some bills that you just keep forgetting to pay, try signing up for autopay. Most companies have some version of an automatic payment system that can help you stay organized with payments. While it’s a simple step, this can help reduce missed or late payments if they are a consistent problem for your credit score.
You should get in the habit of checking your credit report at least three times per year. This will help protect you from identity theft and will allow you to flag anything that is reported incorrectly. If an account reports missed payments to the credit bureau that you know were paid, this can affect your credit score substantially. If you notice an irregularity or mistake, you should notify the bureau immediately to have it addressed.
If you have a credit card that you are in good standing with, reach out to see if you can get a higher credit limit. If your credit score increased since your last limit increase or your income has increased, you may be eligible for a higher limit. And remember – a higher limit means that your Credit Utilization Ratio will automatically drop, as your available credit will increase.
Your credit score looks at your overall debt to credit limit ratio, as well as this ratio for individual accounts. So if you have an account with a credit limit of $1500 and a debt of $1000, you have a 66% Credit Utilization Score for that account. Paying down these accounts first will help decrease that ratio and help your score much more than if you pay down another bill that has a lower ratio. Even if you owe more money on the other account, paying down the smaller bill may be more beneficial.
Having a good credit score is vitally important to having a healthy financial future. Try out some of these tips and see how they affect your credit score. If refinancing your car loan is something you are considering, reach out to Auto Approve to see how much money we can save you!