35% of millennials are working professionals who have steady jobs, go through the cycle of wanting to move into a bigger apartment or renovate their home space. Maybe buy a new car, or plan a trip somewhere. In all these scenarios, a credit score needs to make this happen.
At this point, you’re probably scratching your head and thinking what else is missing to get that credit score up? Are you doing enough by settling bills on time, paying a little more than the minimum amount on your credit card, and paying loans on schedule?
I can tell you now it's not enough. There are ways to improve your credit score and set you up for better opportunities.
So the big question is, how do you improve your credit score before applying for a loan or an increase in your credit limit?
Let’s dive in.
What are Credit Scores?
Have you ever heard of a credit score? I’d guess not because we remain clueless about what happens after making the credit card or loan payments. Did you have any idea that paying promptly or falling behind will have its consequences?
Did anyone take the time to explain how this affects your future applications for loans or increase in credit limit? Unless you sit down with a loan officer or a credit card issuer, you’ll likely ignore this term and go about your business.
A credit score is a number that determines your creditworthiness between the values of 300-850 points. If you get a higher score, you have a better profile as a borrower to the lenders. Your credit history is a portfolio of your existing open accounts, repayment history with the existing debts, and other financial obligations logged into your point system.
Now, let’s cover some common questions.
The Purpose of a Credit Score
Credit scores serve as points on a report card of managing finances. When you have a high score then you'rre seen as a healthy borrower. However, if you have a low score, lenders can predict if you are a subprime borrower or part of the percentage that will be delinquent in the future.
The result of your credit score is the basis for the terms of the loan agreement, the down payment percentage, and the interest rate for a term period.
Banks or Credit Issuers, do not investigate or check your credit score unless it is requested. It is neither part of your credit report nor logged into your credit history. But they will improve your credit score and assess how to handle your account in the event of a hard inquiry.
Your payment habits are closely monitored and ranked according to points, it's the reason why your history can change at any given time. Banks look at how often you made late payments in the past. Additionally, they examine how much and how long your existing debts are. They also investigate if you have other financial obligations.
No need to worry because there is no minimum credit score required. Those without a credit card and pay directly through the checking account will have a lower score than someone who uses a card. The payment history is recorded on the card payments.
Lenders or Creditors use VantageScore developed by the three major credit bureaus. Some will classify the credit score of 661 as good, while FICO (Fair Isaac Corporation) score is 670. To be on the safe side, you should set your credit score no less than 661 and use credit boosters to push it up.
If you score 300-579, you better work on applying credit boosters to pull you into 580-669 and have a fair score. A score below 661- 670 labeled as a subprime applicant, will have to pay their mortgages on higher interest than the conventional mortgage rate.
With a score higher than 700, you are a healthy borrower and enjoy the perks of lower interest rates, longer payment terms, and faster approvals for loans or credit requests. You may even be surprised with new credit cards issued to your name and used at your pleasure.
How to Make Credit Boosters Work For You
A credit booster allows you to add additional data to your credit history and boost your FICO scores. The scores give the lender an idea of the kind of borrower under the given criteria:
- On-Time Payment History- 35%
- Credit Utilization or Debts Owed- 30%
- Length of Credit History- 15%
- Credit Mix- 10%
- New Credit- 10%
Your payment history weighs heavily in determining your FICO score. The credit bureau accepts the records of your monthly payments on your car amortization, student loans, and mortgages. If there is no history to refer to, then you get a low score or considered a thin-file individual.
A credit booster helps increase the credit score of those who have a no credit history. Your bank payments for your monthly rent, cell phones, tuition, and utility bills paid on time are all recorded. This valid data predicts the likelihood of someone who will pay a debt.
Benefit from Using Credit Boosters
Credit Boosters can benefit you if your goal is to improve credit score. The difference in achieving this lies in how committed you are to earning those points. Even if you start from the lowest score, you can always do something to get a credit boost and stick to a disciplined plan of spending.
A credit booster will be of no help to those who have an extended history of not paying on time. It's best to get on the program and pay attention to your balances and due dates because the credit booster records only positive credit history. Using the credit booster will be helpful for the different applicants listed:
- Thin file individuals who have no credit history
- Poor credit history but started recent reliable payments of financial obligations
- Individuals with credit scores of 550 to 625 or the gray area scorers
Don't Punish Yourself If Your Credit Score is This Low
I’ll make no judgments, but if your score falls under 600 points, my guess is you either overspent or neglected to monitor your card totals. Maybe you missed out on paying your credit card and loans on time or exceeded your credit utilization ratio. Correct the issue and give yourself time to keep working your way to push up your FICO score.
A person with a credit score below 600 or a sub-par client will have to face higher interest rates when applying for a personal loan to pay off the credit cards. You’ll probably save more with a bank loan than paying the interest charges of your credit card. In the long run, your actions will save you from throwing away hard-earned money.
Even with serious effort of financial belt-tightening or an aggressive debt-payment plan, you must give yourself more time. But every small change will produce a positive result and boost your credit score. So keep trying to lower your credit utilization ratio and maintain your on-time payments for good credit standing.
How To Build Credit the Right Way
I’ve listed some practical ways to build and improve your credit score. Have an open mind to the following suggestions and see the positive effect on your credit utilization ratio.
1. Set Realistic Expectations to Improving Credit
There is no instant formula to building your credit score, and like any stable foundation, this takes time. Setting realistic expectations on your goal gives a clear vision to achieve higher credit scores. But accept that this takes time and discipline to get to the credit score you want
2. Lifestyle Changes for a Better Financial Goal
Carefully allocate your monthly income to allow payments on time. It may entail that you tighten up your spending so you can make payments twice a month. This action will lower down your credit card balance and save you from paying high-interest.
3. Know when your Credit Card Company Reports your Balance to a Credit Bureau
The credit card issuers report your balance on the closing date or the last day of the billing cycle. Be careful not to confuse this with the statement due date in your bill. Knowing this schedule allows you to make payments before the closing date and reflect a low or zero balance for the month.
4. Pay down Debt and Pay Twice a Month to Keep Balances Low
Paying down your debt twice a month keeps balances low on a credit card. If you made an expensive purchase, it’s best to pay two weeks before the closing date and another payment before the closing date.
5. Pay Bills on time and Get Credit for Utility and Cell Phone Subscription
Paying your loans, credit cards, and other financial contracts on time shows your commitment to pay your obligations. The same rule applies to utility and cell phone payments done through your bank account. Experian Boost will record these payments and add them to your credit score.
6. Dispute Credit Errors on Credit Report
You have to check your credit reports with TransUnion, Equifax, and Experian for incorrect reporting or discrepancies. Late payments, listed accounts, or inaccurate findings must be flagged and disputed. Then request for a correction to avoid pulling your score down.
7. Raise Credit Limits Carefully
The goal of raising your credit is to add to your available balance. Having a reasonably healthy score versus applying when your credit history is on a downward trend will alert the issuer that you are going through a financial crisis. You can request a credit line increase every 6-12 months to help with your credit utilization ratio.
Will A Credit Limit Increase Hurt Your Credit Score?
Before you request an increase in your credit card limit, you must remember the different scenarios that can play out. The lender will dig deep into your credit history and either approve it based on your good standing or reject it because you are a risk applicant who may or may not settle a debt.
The issuer may conduct a hard credit inquiry that will temporarily pull down points from your credit score. But if your income has increased with a positive credit history, you hit two birds with one stone. You get approval, and you push up your credit utilization ratio.
In the same way, if your hard credit inquiry shows negative findings on late payments and high credit card balances, then your credit score goes down. Credit card balances are added at any given time and divided by the overall total limit. The value directly affects your credit utilization ratio.
How to Sign Up For a Secured Credit Card
A secured credit card is backed up by a cash deposit wherein you pay upfront, and the credit limit is the same as your credit limit. You use this as a regular credit card with your on-time payments reported to the three credit bureaus.
You can apply online and fund your checking or savings account. Another way is to mail a cashier’s check or money order to the Credit Card issuer of your choice. Your approval will come in the form of your secured credit card.
Apps to Help Boost Your Credit Score
There are many apps and financial instruments to help boost your credit score. I suggest you study each one and see what is helpful for you to improve your credit score.
Experian Boost is a free service reporting Bureau that allows you to add data to your credit history to improve your FICO score. Since your on-time payment history is the item that lenders or banks look into, this is where Experian will record your three months of payments within a six-month window for the Experian Boost to work.
The boost allows you to add additional on-time payments to your credit report by linking your checking account. The one used to pay for your utility providers, telecoms, and media video streaming. You will choose what items have positive payment histories and added as data in the Experian credit report. This additional information increases your FICO 8 credit score.
TransUnion caters to businesses and the public sector with a monthly credit monitoring fee.
You can access the online credit score simulator, which helps you see how future events and actions like closing a credit card or applying for a new loan will affect your credit score. The CreditCompass feature gives customized recommendations to get your credit score in shape. Lastly, it has TrueIdentity for identity theft insurance.
You get your credit reports, credit scores, and identity protection of products to the consumer. Aside from getting email reports, instant alerts will notify you if someone uses your name for a credit application.
Credit Karma has the credit Score Simulator that gives you an estimated outcome based on your latest TransUnion credit report. It helps you dig into possibilities of what you can do but does not guarantee future credit score changes.
Your score from VantageScore 3.0 shows your credit health. The working simulator predicts how an estimated action will affect your score. This helps you whether to invest or prioritize payments.
myFICO allows you to make sense of your FICO scores. It gives you a comparison of your data from the three credit bureaus and makes you understand the score differences. By monitoring your credit score, you can simulate credit events that will add or hurt your FICO score.
It helps you monitor your files and informs you of any changes in inquiries, new accounts, changes in the address, or late payments. It's like a personal tracker, so you do not miss out on your financial moves.
Personal Capital is a Robo-advisor algorithm and online financial advisor management service. Ideal for the high net-worth investors that need advice for investment planning, link existing accounts, track spending, portfolio performance, retirement progress, and fees.
You can use its free tools such as the investment checkup, 401 (k) fee analyzer, and spending tracker. You can even link your bank, brokerage, and credit card accounts. You'll get an analysis of your asset allocation and inform you what you need to increase or decrease in your holdings of assets.
You Now Know How to Improve Your Credit Score
The whole exercise of acquainting yourself with your credit score gives you a clear picture of how you will handle your hard-earned money. It’s a big step in managing your payments, so you get approved for a loan or a limit increase.
You may be working hard and fulfilling all the expected payments of a responsible individual. Yet, your credit score can stay flat or increase at a slow rate. The good news is that you now have a few tactics up your sleeve that’ll help improve your credit score to the top.
After all, you pay the living necessities and the utilities on time to enjoy continued service. You might as well use this data as proof of your reliability. Let the data work for your benefit and earn credit points for consistent payment history.
Having a good credit score will allow you better opportunities for an improved quality of life. If you apply at least one of the tactics covered in this article, I’m sure you’ll be financially healthier than before.