Get yourself on the best foot forward in your home buying journey, with a healthy credit score.
If you want to get the best deals, more reasonable interest rates, and more power in the negotiating table, you'll love this guide on increasing credit scores.
In fact, this is the same process to raise my credit score by 97 points.
Now let's get down to business.
What are credit scores?
Your credit score simply gives you an overview of your financial health. This gives your lenders an impression of how responsible you are in utilizing your credit.
And the better your score is, the easier you will find it to be approved for new loans or lines of credit. If you are thinking of what your scoring is, did you know that there are many different scoring systems and algorithms that could calculate a credit score?
Think Experian, TransUnion, and Equifax. And they have numerous automatic scoring models that vary in different scales.
It is important to know where you stand in knowing your credit scores, by then, you will be able to identify many ways and areas in which you must be focusing!
I know that fulfilling and double-checking your credit obligations can get overwhelming and exhausting, but at the end of the day, all these things are necessary for credit score companies to collect data and grade you in your debt management.
Grading Areas You Must Consider to Assess Your Ability to Pay Off Debt
Before anything else, put in mind that credit scores gradually develop based on your creditor's reporting. This is the reason as it might differ sometimes even as often as from day to day.
A great analogy to help you better understand your ability to pay off your debt is viewing your credit score in the same way as your weight. In the mornings, it will be different than in the afternoon but that does not necessarily mean you have more fat, and the scoring system is the difference between reading your weight in kilos vs pounds.
If you are still searching for answers as to what you can do and examine, let us find out how to increase your credit score by 97 points!
Credit score agencies consider the following factors to grade your ability to pay off debt:
- Utilization Ratio,
- On-Time Payment History,
- Derogatory Marks,
- Age of Credit History,
- New Inquiries,
- Total Accounts
Now let's get into the details of each factor (and step towards improving one's credit score):
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Utilization Ratio
The bank will look at your credit status on three terms:
- whether you're not overleveraging,
- whether you are not taking on more debt than you can afford and
- whether you do not max out your cards and lines of credit.
After this, they will grade your utilization ratio.
It is crucial in your quest to improve your credit score that you figure this ratio out on your own. Calculate the ratio you take the credit used and divide it over the total of all credit card/line of credit limits. This goes this way, take the example below as a guide.
For example, if you have 3 credit cards and the balance is as follows: $100, $300, and $400, with a credit limit of $3,000, $1,500, and $2000. Your total utilized amount is $800 out of $6,500 available, and that will give you a utilization ratio of 23%.
Now, what if the bank also wants to see you use your credit - since that is how they make money? What you could do for that is to utilize at least 1% every month, anything over that will proportionately affect your credit score and if you are applying for a new credit you do not want to be using more than 49% of your current available credit. Take note that this does not apply to fixed loans.
But there are always hacks out there! And I have some hacks for this.
Hack #1. The credit score for each account is typically reported to the bureau once a month, which is a couple of days after your monthly payment due date. Always make at least a minimum payment on the due date but have the lowest balance possible on the day that the balance is recorded. Sometimes, moving your telephone bill to be scheduled after your reporting day can make a huge difference - especially when you are starting with credit limits in the hundreds. You can check your banking app or set up credit karma to track those dates. Remember, the utilization ratio does not count fixed payments such as student loans, car payments, or mortgages.
Hack #2. This applies especially when you are starting. Your credit limits might be low and it will be a bit tricky to keep your utilization low. I encourage you to keep your score healthy and ask for a credit increase religiously every 6 months - this will not hurt your credit and you will have better chances of getting your credit increased rather than waiting for the bank to contact you - which rarely happens.
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On-time payments
ALWAYS make at least the minimum amount payment! And when it says on-time payments, be sure to comply on time!
I know it sounds hard to do, but this can be easily done by linking your checking account and setting up an autopay. Life happens and emergencies come up but make sure you do not spend more than you can afford and always pay your card in full!
If you end up missing a loan or a fixed monthly payment, pay it off immediately! Here’s another tip that you must consider using, and I have 2 tips for you.
Tip #1: The creditors will typically give you 30 days before they report the payment late - this adds additional late fees and penalties that are just not worth it.
Tip #2: Let's say you are 2 months behind on your car loan. Each missing month is counted separately. So, if you miss your January 1st car payment and do not pay for it until February 15th. You have a 30 day missed payment reported to the bureau and if you do not pay the next month's payment you will have another missed payment recorded. Always pay off the entire amount owed as soon as possible!
Bear in mind that late payments are calculated based on a percentage of late payments made throughout your credit history. You sure want to be as close to 100% on-time payments as possible. If you do end up having some late payments the most recent late payments will affect your credit score the most. This means that your late payment 3 years ago will not have the same weight as a late payment from last month.
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Derogatory Marks
The derogatory marks refer to any collections, tax liens, bankruptcies, or judgment against you and they stay on your credit report for 8 years since the last recording.
Meaning to say, if you have a debt in the collection and you pay it off after 2 years - it will stay on your report for 8 more years. You sure wouldn’t want that, right?
The derogatory marks affect the credit score the most first-year - each month after that they have a smaller and smaller impact on your overall credit.
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Credit History
To take hold and use of your credit history, one must use that one golden tip in finance is to never close your first account. Through this, the bank can calculate your age of the credit by taking the length of all your credit accounts and calculating the average of all the time combined.
For example, let’s say you have 2 credit cards. Your first one is 3 years old and your newest one you just got - It means that your average credit history age is 1.5 years - a big difference right?
The greater the average age of credit, the better for you. This is a lifelong process you must take steps slowly to further accomplish and maintain.
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New Inquiries and Total Accounts
Last on our list, the excessive inquiries for credit by new third-party creditors, and the total number of accounts highly pose factors that could negatively impact your credit score. Ideally, you will want to limit the number of new inquiries to less than 2 per year. This action involves any type of credit check such as when you apply for a new apartment to lease or a job screening.
Note, when you are applying for a mortgage you have a 14-15 day window to shop for best rates and it all is collectively counted as 1 inquiry - according to Equifax. Meanwhile, a similar exception applies for car loans even though you have much less than 14 days. When banks see that you have a lot of requests for loans it appears that you are credit hungry, which in their eyes could mean that you are in financial trouble and they will be careful when reviewing your application. Whereas, to the total number of accounts you want as many accounts as possible both closed and opened.
Conclusion
And that's all there is to it.
Essentially, it all boils down to being wise enough or to having someone to be financially responsible in holding even your oldest credit card as an authorized user. As an authorized user, the institution will report you to the bureau just like a primary user. Once again, if they are responsible and are following all the credit rules that we have talked about it will boost your credit score immediately, and the best thing here is that you don't even have to use the credit. Now, if they end up not being as responsible as you have thought, it will negatively affect your credit so please be careful. And for those that are not as lucky, and are either starting from 0 or have a bad credit history and no one to rely on - there is an option for you and that is a secured credit card.
What can happen with that is, let’s say when you deposit $1,000 to the bank for your monthly credit limit to be $1,000. It is not like a debit card - it is not prepaid. Therefore, each month you still need to make payments on what you have used on the card. After a little over a year of good management, you can ask the bank to reconsider and give you your initial deposit back. The entire process might be a bit overwhelming but very worthy. This could be a difference between a $900 monthly payment and a $400 one for the same car!
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