This is a detailed guide on how to improve your credit score.
It is essential you have a good credit score, otherwise, your loans and credit applications will always be denied. A bad credit score can affect you negatively.
Whether you used to have bad spending habits or whether you have been a victim of fraud, and you wish to improve your credit score, this guide will help.
In this article, I will show you how to improve your credit score easily.
First, before I show you how to improve your credit score, you need to determine which of your accounts needs improvement.
To do that, you first need to understand what a credit rating/report is all about, and then you need to get a copy of your credit report from at least two credit bureaus or agencies.
Table of Contents
What Is Credit Rating?
A credit rating simply means a grade that is attributed to a person, an institution or a state in order to determine if they are able to repay their debt at a specific point in time.
Depending on the financial capability of the individual, this rating can either improve or deteriorate.
Credit rating affects several factors like the minimum interest rate the lenders are able to demand since it is a means of assessing the riskiness of a borrower.
To help you better understand this concept, consider three cases where you might have heard about what is credit rating; I will explain each of these scenarios:
1. You applied for a new credit card and your bank asked you to provide personal information in order to obtain your credit score:
When you apply for credit, lenders like financial institutions and retailers need to assess your ability to repay the debt. For that, they reach out to credit reporting agencies.
Those agencies have tracked your credit history since your first transaction and have calculated your credit score. Different agencies can develop different scoring models in the same country.
A common model used in North America is the FICO score, which ranges from 300 to 900. The higher your credit score the higher your chances of getting approved for a loan.
The factors that determine your score include the number of credit products you have, your payment history, and the amounts you owe compared to your income.
2. Your employer tells you the company has been downgraded by Fitch and it may impact this year’s financial results:
Similar to individuals, publicly traded companies get rated, but by corporate rating agencies.
More exactly, it is the debt instruments those companies issue (bonds) that are rated. Common credit agencies include Moody’s, Fitch, and Standard & Poor’s.
Their rating system ranges from AAA (the best) to D (the worst), with varying intermediate grades.
Ratings are derived from a thorough analysis of financial statements to determine the ability of a company to pay back its creditors (bondholders).
Information on the leverage, coverage, liquidity, profitability, and management of a company are all important factors in assessing credit risk.
Credit ratings have become a powerful tool because a slight improvement (upgrade) or deterioration (downgrade) in credit rating can dramatically affect investors’ perception of a company.
This in turn influences the price at which traders are willing to buy and sell the company’s bond and stock.
The rationale behind this is that if a company relies heavily on debt to operate, a downgrade in its credit rating may incentivize lenders to ask for their money back and the company would rapidly run out of cash, running the risk of going bankrupt.
So despite the fact that a credit rating provides only a partial and reversible opinion about a company’s credit risk, downgrades are generally NOT well perceived by financial markets.
3. You hear in the news that The United States and France lost their Tripe A rating in the aftermath of the financial crisis:
Similar to companies and individuals, Countries and governmental institutions get evaluated by rating agencies in order to communicate to their current and potential business partners their ability to repay the funds they have borrowed.
The better a country’s credit rating, the more willing are financial institutions, foreign countries, and investors to do business with it, either through the purchase of sovereign bonds or foreign direct investment.
Criteria that determine a high credit rating for a country are economic development, political environment, financial transparency, and macroeconomic metrics like GDP, inflation, fiscal balance, external debt, and default history.
When a country gets downgraded, it sends a bad signal to lenders and investors and it can affect the cost of raising funds, making it more expensive for the government to borrow money in order to realize necessary infrastructure and social projects.
This in turn can impact the whole economy and citizens like you and me.
What is a credit report?
A credit report is a document held by a credit-reporting agency that summarizes your credit history.
From the first time you borrowed money or applied for credit, the lending institutions (banks, credit unions and retailers) have been sending information about your payment history to credit-reporting agencies like Equifax and TransUnion.
This is intended to give potential future creditors an idea of the amount of risk that you represent to them.
Credit reports tell creditors about late payments you’ve made, judgments against you, and any other applicable financial issues.
Credit reports do not include your income or any information about you personally.
Why You Need a Credit Report
Obtaining a credit report is important any time you’re thinking of applying for new debt. This includes credit cards, mortgages, car loans, personal loans, lines of credit, and retail financing plans.
You should also check your credit report on an annual basis to improve your credit score and protect yourself against identity theft. Indeed, your credit report is your first line of defense against fraudulent charges.
How to Get a Credit Report in the United States
Every American citizen is allowed to get a free credit report every year from each of the three major reporting bureaus.
If you want to get your credit report you can either go to the Annual Credit Report website or directly to Experian, Transunion or Equifax.
Once you’re on the website, you can simply apply to get your credit report.
You will need your social security number and date of birth to request the report, and the website may ask you some questions regarding your credit history to ensure that you are who you say you are.
The credit report will be viewable online and you can review it for any inaccuracies.
How to Get Your Credit Report in Canada
Canadian citizens can request a copy of their credit report from either Equifax Canada or Transunion Canada using the same procedure that United States citizens need to follow.
The credit report can either be mailed directly to the citizen or viewed online.
What is a Credit Score?
In both the United States and Canada, a credit score generally ranges from 300 to 850 with below 450 being very poor and above 750 being very good.
In Canada, there’s sometimes an additional credit rating that ranges from 1 to 9. This rating is attached to each of your credit accounts.
A credit rating of 9 is considered very bad, suggesting you never pay your bills, while a credit rating of 1 usually means that you pay on time.
How to Get Your Credit Score
Your credit report is not the same as a credit score. Your credit report is simply your credit history, whereas your credit score will be a number that is derived from that history.
While you can get a credit report for free in the United States and Canada, a credit score usually requires the payment of a small fee.
A higher credit score implies that you are very likely to pay off any debt accrued with a creditor while a lower credit score denotes the strong possibility that you could default on a debt or pay it late.
3 Credit Score Myths You Should Know
A credit score is a rating that reflects your ability to pay back your debt based on your past credit performance.
As explained in this article, a higher credit score implies that you are very likely to pay off your credit while a lower credit score denotes a strong possibility that you could default on a debt or pay it late.
However, there are some myths that anyone willing to improve their score should know.
Myth 1: There is only one kind of credit score
Contrary to what one might think, there is no approved method for calculating credit scores, therefore different credit bureaus can use different formulas.
Among the multitude of agencies out there, there are three main agencies worth knowing: Experian, Equifax, and TransUnion.
You might think that their scores would be similar, but that is not the case because each of them have their own calculation method.
Myth 2: Cancelling your cards help your credit score
It is easy to assume that the fewer credit cards you own, the higher your score. However it is really more a matter of the balance you owe in relation to the total amount of credit that you can draw from.
Therefore, sometimes you are better off reducing your balance rather than canceling some of your credit products.
For example, let’s say that you have two credit cards: The first one has a limit of five thousand and a balance of three thousand (i.e. 60% utilization rate).
The second card also has a limit of five thousand but with a zero balance.
The two cards combined only represent 30% utilization of the total ten thousand dollars available to you, but if you cancel the second card, your utilization rate will go up to 60%, which may harm your score.
However, keep in mind that adding a card just to increase your available credit is not a great idea because applying for a card could incur a credit check that can hurt your credit score.
Myth 3: Your credit score is completely right
Credit agencies often make errors on your credit score, either by assigning the wrong information to your account or by not updating it properly.
Therefore, you need to check your credit score and credit report on a regular basis at the main credit agencies. Your score may improve significantly if you manage to have your information corrected.
10 Easy Ways To Improve Your Credit Score
There are many tips that will help guide you on how to improve your credit score. However, here are 10 easy tips to improve your credit score that you should begin to do immediately.
1. Pay Bills On Time
In the event of borrowing, lenders take their time to check your reliability in paying your bills and how prompt you are in making such payments by reviewing your past records of payments.
Making prompt payments helps in predicting future payments in relation to paying on time and gaining the trust of lenders.
Paying bills on time has a way of influencing your credit scores in a good way because of the reliability it builds in the minds of lenders towards you.
In the same way, not paying your bills on time would have a negative effect on your credit scores.
Payments whether late or prompt reflect on your credit report and so have a great impact on your credit score because it builds up a reputation that would encourage lenders to either trust you or not.
2. Make Cell Phone And Utility Payments On Time
Making cell phone and utility payments on time also has a way of improving your credit scores which would be beneficial to you.
Your numerous bank accounts can be connected to the platform to enable a review of your previous cell phone payments and utility payments which creates a record that improves your credit scores.
3. Debt Payment and Keeping Credit Balances Low
In calculating credit score, utilizing credit ratio is a very important number and it is gotten by summing up all balances from your credit card and dividing it by the credit limit total.
In order to get the ratio of your average credit utilization, you should check your previous credit card statements from one year and add the balance of each statement for every month on all your credit cards and divide it by 12 to get the amount of credit you make use of in one month.
When your credit utilization ratio is low, it creates an impression on the lenders that you know how to manage your credit well and don’t use up your credit cards often.
4. Open New Credit Accounts When Necessary
You should not open accounts because you want a better credit mix because it would most likely not boost your credit score.
Piling up unnecessary credit has a way of affecting your credit score negatively by causing you to spend money too much and thereby creating huge debts to be paid.
5. Leave Unused Credit Cards Open
Leaving unused credit cards open is a wise technique in situations whereby they don’t cost you certain yearly charges because when you fail to leave such credit cards open, your credit utilization ratio may increase.
On the other hand, your credit score can reduce when you have fewer accounts while owing the same amount.
6. Reduce Your Number Of Application For New Credit
When you set up a new credit card, your total credit limit may increase but apply for new credit would cause attention on your credit report and this much attention into your credit report has a way of affecting your credit score negatively.
On the other hand, the effect would clear out after some time and could take about 24 months to clear out thereby requiring you to stay patient while you avoid applying for more new credit.
7. Fix All Inaccuracies On Your Credit Report
It is important to review your credit reports at the required agencies or offices to correct any inaccuracies on them if any because the presence of inaccuracies on your credit reports has the ability to reduce your credit scores.
Ensure that all the accounts are correctly entered on your report and also point out any error found to ensure that it is rectified immediately to avoid any future inconveniences it may cause you especially your credit score.
8. Borrow From Friend Or Relative
When you have a problem, instead of using a credit product, that will cost you a higher interest rate, borrow from your relative or friend instead.
9. If you by chance lose your debit card, credit card, or ID card, ensure you quickly contact your financial institution, your creditors, and also all relevant government offices and credit agencies, and notify them of your loss in order to prevent fraud and identity theft.
10. Duration Of Rebuilding Your Credit Score.
In a situation whereby your credit report contains negative information that can reduce your credit score such as debts or delays in paying certain bills, you are expected to make those payments while you wait for your credit score to be improved.
It may take some time to rebuild but it is worth the wait.
Note that the duration of time that it takes to rebuild your credit score is depending on the factors that led to the credit score reduction in the first place.
How To Build Your Credit Scores
In a situation whereby you don’t have a credit score due to a lack of credit experience, your credit wallet would be quite slim and it means that you have little or no credit accounts on your credit reports.
Therefore, to expand the size of your credit wallet you can make an application for a genuine credit card that is secured or you may choose to take a loan to build your credit or several other ways that are approved for building your credit score.
That’s all on how to improve your credit score.
I hope this helps?
