A credit score is one vital thing that any financially conscious person needs to maintain to lead a life full of opportunities. Also called Fico Scores, credit scores are rated from 350 to 850. Anyone with a 700 credit score has all the advantages a credit score can give. While any score below 660 can make it challenging to get an approval for even the smallest credit card application.
Fifty percent of the American populace has a credit score rating above 700. Those in the 600 to 700 bracket are about 27 percent, while those below 600 are about 15 percent. Understanding the different factors that affect credit scores can help you know how to increase your credit score. Hence, you can join the 58% of Americans with respectable scores.
Table of Contents
What’s The Composition of Your Credit Score?
35 Percent is Payment History
These are entries of all the bill payments you’ve ever made. That’s true; every bill that reports to the major credit bureaus will also reflect on your credit report. Ensure every bill is paid early enough and avoid being over 30 days late since creditors will report that on your credit.
If you are constrained financially and feel that you’re not going to pay on time, always let the creditor know in advance. Certain installment loans are flexible enough to give debtors a 30-day grace period for late repayments without the debtor experiencing adverse consequences.
Do note that late payments from the past seem to have a less severe effect on your credit score than the most recent ones. Therefore, don’t be caught by surprise when you see a 60 point score drop on a recent late payment even with excellent credit history.
30 Percent – Credit Card Capacity
The trick with credit scores is not the amount of money owed but the ratio of available revolving credit. Generally, you’ll have a lower score when your usage is higher. For example, say your total credit card limit is $500 and you utilize $400. This is an 80% utilization and will lower your credit score more than lower utilization. On the contrary, when your available limit is $100,000 and your usage is $50,000, your credit score will be higher.
As such, it’s highly recommended not to carry balances on many credit cards. Additionally, balances should always be at most 10% of the credit limit for all revolving accounts. Being mindful of these credit hacks will help optimize your credit score as high as possible.
15 Percent – Length of Credit History
With an older credit history, your credit score will tend to be stronger. A credit consumer who has maintained their credit profile for over 20 years will most likely have a higher credit score than one with a 10-year-old credit profile, provided all other factors are the same.
10 Percent – Credit Types
Types of credit refers to the different credit accounts existing on a credit profile. You should have at least one each of the following accounts: Installment account, mortgage account, and credit card/revolving account.
Out of the three account types, missing an open and active credit card account will create the most adverse effect on your credit score. Therefore, if you currently don’t have a credit card account, acquiring one can earn you a 30 points boost on your Fico Score.
10 Percent – New Credit
Credit scores are also determined by considering the average time an account has been open on a credit report. Be cautious not to open many new credit accounts as it will negatively affect this factor. Also, you shouldn’t close down your old credit accounts as that will lower your score as well. You’ll come to realize that as your account grows older, your credit score will also improve. Needless To Say, opening too many new accounts will negate this long-term benefit.
Another factor considered under this category is hard pull requests from lenders on your credit report. Always ensure that your credit report has as few inquiries as possible.
How to Strengthen Your Credit Score
PAYMENT HISTORY CORRECTION: (Up to +/- 100 points on credit score)
This strategy involves checking your credit report to ensure it’s free of any undesirable payment information that can raise eyebrows. Most credit repair firms only offer to handle non-complex credit-related issues. However, there are lots of things that can be done to correct negative credit report information.
Whether it’s late payments, tax liens, liens, or judgment, they can all be appropriately rectified through the following strategies.
- A dispute letter to the credit bureau: you can write an effective dispute letter to each of the three main credit bureaus to query the items on your credit report. However, this method is most effective if you’re disputing items older than four years.
- Collections settlement approach: if you have fresh and valid collections on your credit report, raising a dispute with the bureaus will not make them go away. You’re better off negotiating a pay-for-delete deal for the accounts to be removed.
- Direct dispute with creditors: if you have any recent late payments or charge-offs from a missed payment, you can strategically engage the creditors to remove the negative listings.
- Victims of identity theft and fraud – When you’ve got a negative listing on your report due to someone else using your identity for fraudulent activities. There are special procedures that can be followed to remove them.
OPTIMIZING CREDIT CARD CAPACITY THROUGH CARD BALANCE PAYMENTS: (Up to 60 point credit score increase)
Lower the balances on all revolving accounts to zero but don’t shut down any of them. That is, keep your limits high but the balances at zero. However, let one of the cards have a balance of about 2 percent of your entire revolving limit.
If unable to settle all balances at once, settle the balances of credit cards that are almost hitting their limit. You may also opt to move your revolving balances to an installment account. I do want to emphasize, don’t close down those revolving accounts after transferring the balances.
NEW CREDIT OPTIMIZATION AND CREDIT LENGTH: (Gain up to 40 points on credit score)
- Always strive to minimize opening new credit accounts. Only do it if it’s necessary or if you want to achieve credit account diversity.
- Always check with your present credit lender for any offers before transferring balances. This strategy is better than opening a new credit card account. This will help keep your credit length as high as possible.
- If you recently terminated revolving accounts, inquire to the lenders of the closed accounts if they can re-open them. Again, this way you can avoid opening up another new account and dinging your score.
CREDIT TYPE DIVERSIFICATION : (Possible credit score gain of up to 20 points)
If your current credit report doesn’t have either a credit card or installment loan. You should open one of each to add diversity to your credit report.
The Last Resort: Make A Move to Improve Your Credit Score
The strategies described can help you rebuild your creditworthiness in the shortest time possible. You must follow these recommendations to a tee.
But if you don’t have the time, expertise, or feel that they’re too overwhelming. You might want to seek a professional credit repair consulting service.
The following are our suggestions for your next course of action.
1. Scrutinize your credit report
Ask for a copy of your credit report from your agency and confirm your score. Check through your primary personal data and other listings to identify any errors or omissions. If you note any faults that can be disputed, reach out to the credit bureau in question and seek rectification.
2. Settle any missed payments
Settle any bills that are less than 30 days past their due dates to avoid having them reflected on your credit report. Additionally, set a reminder on your calendar so that you won’t miss any payments in the future.
3. Keep hard inquiries off-limit
Hard inquiries are usually incurred when applying for a new loan and can damage your credit score. It’s highly recommended to avoid opening new credit accounts or loans until you’ve improved your credit score.
4. Apply for a secured credit card
Get yourself a secured credit card with the highest credit limit possible. Then ensure you always make your payments on time to start building positive credit.
