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How to Raise Your Credit Score
Your credit score is a number calculated and assigned to you by one of the three credit reporting bureaus. The number is designed to give lenders and banks an idea of how reliable you are in paying back borrowed money. As you make on-time payments on lent money and demonstrate good borrowing habits, your score goes up. But if you are late on payments, forget to make payments or have made other financial mistakes in the past, your score will go down. The higher your credit score number, the more reliable lenders and banks will think you are.
Lenders use this number to help decide who to approve for loans, how much money to approve them for and what interest rate to charge. If you’re planning on buying a car, a house, getting a personal loan, signing up for a credit card or borrowing money for any purpose now or in the future, having a high credit score should be important to you. Your credit score could be the make or break factor in reaching your financial purchase goals.
How to increase your credit score
1. Correct any errors or discrepancies in your credit report.
Your credit score comes from your credit report, which is a document created by one of the three major credit reporting bureaus that details your borrowing history. While these companies do a good job, they are not perfect. According to a study done by the Federal Trade Commission (FTC), one in four consumers had errors on their credit reports.
The first step in increasing your credit score is to get copies of all three of your credit reports and look for errors. If you find errors, dispute them with the reporting bureau. According to the same FTC study, four out of five consumers who disputed something on their report saw modifications. Make sure you’re getting credit for the good things you’ve done and not getting penalized for mistakes you didn’t make.
2. Make sure you have a borrowing history that has variety.
Many people who have never made a late payment in their life find out they have a very low credit score when they go to make a major purchase. The reason for this is the credit reporting bureaus don’t know you personally. The companies can only go off of your borrowing history. If you have no history, it’s hard to classify you as reliable.
To mitigate this, you may need to open some smaller accounts and begin building a history. For example, open a credit card and use that to make purchases instead of your debit card. Pay off the balance at the end of every month, so you don’t accrue interest charges. This is an interest-free way to start building your credit.
3. Don’t close accounts
Part of the credit score calculation is how much of your available credit you are using. The lower the percentage, the higher your score will be. If you close accounts you’ve paid off, it lowers the total available credit you have. While you may now have less debt, you are using a higher percentage of your available credit (even though you didn’t spend a dollar more).
4. Link additional accounts
You can take the previous step one step further if you’ve got friends or family willing to help. If someone close to you has a credit account they’re not using, you can ask to be added as an authorized user. What this will do is raise your available credit, which will lower the percentage of credit you are using. This only works with someone who trusts you, as you would have access to the account. Additionally, this only works if they are not abusing the account. If they spend a lot on the account, it could have the opposite effect.
How credit scores are calculated
Credit scores are not perfect. However, the reporting bureaus — Experian, Equifax, and TransUnion — do a good job delivering a process that works for the masses. Each bureau tracks your credit and borrowing history to calculate the most accurate and useful score possible. Typically, each bureau calculates several different scores for each person, dependent on what you’re trying to borrow for. Understanding how these scores are calculated can help you to develop the best plan to raise your credit score fast.
The most popular credit score is the FICO credit score. According to FICO, these scores are used in over 90% of lending decisions. The score is calculated by looking at five different categories. The score breaks down to 30% is the amount you owe (debt), 35% is your payment history, 15% is the length of your credit history, 10% is new credit and 10% is the mix of your types of credit (the type of credit accounts you have).
While each of the bureaus follows the models laid out by FICO, each bureau may differ in what they include in each category. Because of this, it’s always important to look at all three of your scores because you may not know which score your prospective lender will use.
FICO and the national reporting bureaus are always working to improve the quality and reliability of the scores they report. FICO is working on a new scoring model known as UltraFICO, which takes a look at the existing factors in a traditional FICO score as well as looking at account activity in your bank account that may have been missed. Experian, one of the national credit reporting bureaus, is offering Experian Boost, which works similarly to UltraFico by linking your bank account to your scores to find beneficial behavior that’s been missed.
Protecting your credit
Once you get a higher credit score, you need to be prepared to protect that score. If you don’t, your hard work could all disappear without proper protection and maintenance.
One of the best ways to protect your credit score is by enlisting the help of professionals. Identity theft is a growing threat in the world, and a stolen identity can torpedo your credit score. Thankfully, identity theft companies exist to help you protect yourself at an affordable rate. Three of the top identity theft companies to consider are Identity Guard, IdentityIQ and IdentityForce. These companies monitor your credit reports, the dark web and several other resources to identify attempts to steal your identity and keep you protected.
Additionally, you need to continue practicing good borrowing habits. The same steps that helped you to raise your credit score will help you to keep it high. Make on-time payments, regularly check your report for errors and don’t accumulate excessive debt. A single mistake can stay on your credit report and affect your score for years. Protect the hard work you’ve already done with proactive and diligent efforts.