Improve Your Credit Score

Why does getting a loan seem so stressful? 

We have all been through the anxiety and worry after making a loan or credit card application. Your credit score not only has a strong influence on your financial future, but your life.

Fortunately, a bad credit score is not difficult to fix. Knowing the right steps can help you fix your credit score over time. 

A credit score is an important three-digit number that helps lenders estimate your ability to make the debt repayment on time. The higher your score, the better interest rate you will qualify for. 

However, not everyone has a high credit score. Improving your credit score takes time but the earlier you start, the better it is to handle the issue.

A lot of people are facing financial difficulty due to the coronavirus pandemic. Many have been laid off from their jobs while many others have been forced to take pay cuts or discontinue their businesses. Making payment for essential items has become an all-too-common challenge for many.

In these testing times, a lot of people wonder about the impact of late payments on their credit scores due to COVID-19. However, it is still possible to improve your credit score by following the steps outlined below.

Ready? Let’s jump into it. 

How Are Credit Scores Calculated?

It helps to understand the calculation that goes behind your credit score. In fact, your credit score range can have major implications. The credit score is calculated using a mathematical formula to the information on your credit report.

There is no one algorithm that is used by all companies to calculate the scores. However, the first step in raising your credit score is first understanding how to read a credit report.

It is not necessary for you to have multiple scores because the factors that affect the scores are always similar. The factors that make the score increase or decline is usually the same, only the degree varies. 

A lot of scoring models consider the payment history on credit cards and loans, the amount of revolving credit on the report, and the types of accounts you own. 

Steps to Improve Your Credit Score

In order to improve the score, you need to begin by checking the scores online. Once you get the score, you will also get details about the factors that affect the scores. It is important to be patient and give time for the changes you make to be shown in the credit scores. 

There are some credit score factors that are more crucial than others. Credit utilization ratios and payment history are important in most credit scoring models. They represent about 70% of a credit score. In order to improve your credit score over time, you need to take certain actions. 

Here are eight steps to improve the credit score.

1. Make payments on time
2. Clear debt and maintain a low balance on the credit card
3. Do not close an unused credit card
4. Ask for new credit when you need it
5. Report any inaccuracies in the credit report
6. Make payments twice in a month
7. Raise the credit limit
8. Seek help from a friend or relative

1. Make Payments on Time

Your credit score reflects how regularly you pay the bills. Lenders are keen to know how reliable you are when it comes to paying the bills. It is because the past performance speaks a lot about your future performance.

It is possible to influence the credit score by making all the bill payments on time and you will be eligible for best loans for excellent credit. When you pay late or settle the account for less than what you agreed to pay, it has a negative impact on credit scores. 

You need to pay all the bills on time. Use tools available to you, like automatic payments to ensure that you make the payment regularly each month. 

If you have delayed any payments, you need to clear them at the earliest. Missed payments will be shown in the form of negative information on the credit report and it can affect the credit score. Older late payments have less effect on the score than most recent ones. 

More than 90% of the lenders use FICO credit scores. The score is made up of five different factors- Payment history (35%), usage of credit (30%), age of the credit accounts (15%), new credit inquiries (10%), and credit mix (10%). 

It can be seen that the payment history has a huge impact on the credit score and it is best to pay debts as soon as you can. If you pay your bills responsibly and on time, it will work in your favor. Avoid late payments by creating a filing system and keep a track of the bills, set due date alerts, and automate bill payments from the account.

2. Clear Debt and Maintain a Low Credit Card Balance

The credit utilization ratio is a crucial number.  It can be calculated by adding all the credit card balances at a point of time and dividing it with the credit limit you have. Look at all the credit card statements for the last year to find out the average credit utilization ratio. 

You need to add the statement balances for each month on all the cards and then divide it by 12. The result is the credit you use each month. 

It is better to have a low ratio of around 30% or less. Those with the highest credit scores have very low ratios. It shows that you have not maxed out the credit cards and can handle credit well.

3. Do Not Close Unused Credit Cards

It is best to keep the unused credit cards open, as long as they are not costing you money. Closing an account can increase the credit utilization ratio. 

4. Ask for New Credit When You Need It

Never open accounts only to have a good credit mix. It will not improve the credit score and can harm the score in different ways. It will create a hard inquiry on the credit report and can also tempt you to spend more and increase debt. 

A lot of hard inquiries can have a negative impact on the credit score as they remain on the credit report for two years. 

5. Report Any Inaccuracies in Your Credit Report

Make it a point to check all the credit reporting bureaus for any errors. Any incorrect information can have an impact on the credit score.

You need to verify that the information on the reports is accurate and if there are any errors, you need to dispute the information. If you find mistakes, it is more than feasible to get errors removed from your credit report.

It’s very important to read your credit report regularly. This will help you spot any inaccuracies before they cause harm. 

6. Make Payments Twice in a Month

Let us assume you have had a rough couple of months due to COVID-19 and you need money to make purchases. If you put big items on a credit card to get the rewards, it could throw the credit utilization ratio out of whack. Instead, what you can do is, make a payment two weeks before the closing date and make another payment right before the closing date. 

However, this is only possible if you have the money to pay for the big expenses by the end of the month. Do not use a credit card for a large bill if you want to carry a balance.

It will create an ugly pile of debt in no time. Do not use a credit card as a long term loan and be mindful of the balance on the card. Make the payments before the intro period concludes. 

7. Raise Your Credit Limit

Individuals who often tend to overspend, skip this point. The purpose is to increase the credit limit on your cards so that the utilization ratio declines.

It will only work in your favor if you are not compelled to use the newly available credit. Do not try this if you have a downward trending score. 

The card issuer might see that you are about to have a financial crisis and require additional credit. And it can lead to a decrease in the credit limit. Ensure that your financial situation looks stable and then ask for an increase.

You simply need to call the credit card company and ask for an increase in the credit limit. The higher the limit, the lower your ratio will be and it will help the score. 

8. Seek Help From a Friend or Relative

The length of the credit history will play a role in the credit score. The older the credit history, the better it is for you. In most cases, you only need to sit back and wait for the credit score to improve but if you have a friend with a good credit card account, you can seek their help. 

When a relative or friend adds you to an existing credit card as an authorized user, it will help lengthen your credit history. When the account is in good shape, it is possible to improve the score by being an authorized user. 

How Long Will It Take to Rebuild a Credit Score?

Individuals with negative information on the credit report should pay the bills and give it some time. You cannot rebuild the credit score overnight.

There are several top credit repair companies that can help you improve the score. There is no instant fix to improve the credit score. 

Some changes in the credit score continue to have an impact on the score until they reach a specific age like delinquency. It remains on the credit report for seven years. Inquiries remain on the report for two years and a lot of public record items remain on the report for seven to ten years. 

You can start improving the credit score by checking the score from time to time and identifying the factors that affect the scores. 

COVID-19’s Impact on Credit Scores

The spread of COVID-19 has not only affected the health of many but has also disrupted the finances of several households. There is turmoil in the global markets due to COVID-19 and lenders have become extra cautious about lending money.

You can protect your credit score amidst the pandemic in a number of ways. For example, avoid withdrawing cash from the credit card and maintain a low credit utilization ratio. 

While there is a growing demand for credit to make bill payments, lenders are trying to minimize their risks and they are likely to prefer applicants with a good credit score. It is possible to maintain good credit even during testing times. There are several government programs available to those who are struggling with unemployment and credit. 

Difference Between a Credit Score and Credit Report

A credit score is a number that lenders use to decide how safe or risky you are as a borrower. Top credit monitoring services can give you an insight into the score. The credit report is a list of your lines of credit and payment history but it does not contain the credit score.

It can run into many pages as they detail the accounts and show how diligently you have paid off the outstanding balances. Credit reports also have negative information like bankruptcies or repossessions. 

What Are Soft and Hard Credit Checks?

You might have come across the term hard inquiry and a soft inquiry. It is an inquiry carried out by the lender before approving your application for funds. A hard credit check takes place when you apply for something like a credit card application or a loan application. It has an impact on your credit score. 

In contrast, a soft credit check has no impact on the credit score. A soft credit inquiry will not show up at all. It includes personal credit checks, employment applications, insurance applications, and pre-approved credit offers. 

Building a Credit Score

If you have no credit score due to minimal history with regards to credit, you will have a thin credit file. It means that there are only a few accounts on the credit report, ranging from one to four.

Having a thin credit file means that the lender is not able to get a credit score due to a lack of information in your credit history. You can fatten up the thin credit file by applying for a credit card or becoming an authorized user of someone else’s card.

About the author

Tim Fries

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Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.