A credit score signals to lenders how responsible an individual is when it comes to managing credit. These numerical expressions are arrived at from reports compiled by the three major credit bureaus namely Equifax, Experian, and TransUnion.
The rating is grouped from bad to excellent, ranging from 300 to 850. Bear in mind that your score can vary depending on the method used to calculate and the service provider.
Your credit score is greatly affected by your credit card usage, right from opening the account and making monthly payments, to closing the card account.
As such, it helps to use your cards wisely since your score guides the kind of terms you get when applying for new credit facilities.
How credit scores are calculated
Credit scores are calculated using models based on an individual’s credit report. The two popular scoring models are FICO and VantageScore.
Some of the factors that are considered when calculating credit scores plus typical rating weight include:
- Credit accounts (15%)
- Credit usage (30%)
- Payment history (35%)
- Credit mix (10%)
- New credit inquiries (10%)
Tips to Boost Your Credit Score
Settle your bills early
Your payment history holds the biggest percentage (35%) in the credit scoring system. Furthermore, late payment (missing payments for 30 days or more) can stay on your report for up to 7 years.
One reason that can lead to late payments is borrowing beyond what you can afford which can lead to civil court cases as well as bankruptcy.
If you find yourself in such a situation, it’s best to reach out to your lender and request they don’t report the issue to credit bureaus. In return, come up with a payment plan that you can honor.
You can also consider setting auto payments from your checking accounts directly to avoid late payments.
Check for errors in your credit report
Even the slightest mistakes such as a misspelled name or address could potentially hurt your credit score. Big errors such as accounts being mistakenly reported with late payments, incorrect balances, or double recorded debts can be more damaging.
All three main credit bureaus give their users one free credit report annually. If you happen to find any errors, dispute them immediately. The goal is to make sure that all information is not only corrected but also in real-time.
According to research done by the FTC, 26% of the participants had some error in their credit report. And even though it takes around a month for the bureaus to conclude investigations, disputing the errors can improve your credit score.
Remember that your credit score calculations are made from the information in your report so, any wrong information and the odds of improving your score are against you.
Be an authorized user
Another way of improving your credit score is by becoming an authorized user to an existing account with a good track record. This is especially ingenious if you have a thin credit file.
Your friend’s card directly adds to the history to your report, plus it increases your credit utilization. Typically, a low utilization percentage is what lenders like with a percentage below 30% being favorable.
The best thing about this approach is that, as long as you are listed as an authorized user you don’t have to have access or use the account. All you have to ensure is that the issuer reports to the bureaus.
However, in case of any late payments, your score and that of the card owner will be affected. The method is mostly done between spouses, close friends or relatives who can be trusted.
Create your own history
While applying as an authorized user comes with its fair share of advantages, creating your own credit history is equally important. Having no credit history means your track record is none existent meaning there is no data to determine your creditworthiness.
Note that details such as bankruptcies, wage attachments, and foreclosures, are also recorded in your credit report and scoring systems take the information into consideration.
Lack of personal credit history is a common issue affecting people who use joint cards, mostly children and couples. And in the case of divorce or death, it becomes hard to access credit.
Your credit score is unique and an accurate measure of your ability to sustain debt. And with credit cards being easy to acquire than most other credit facilities, it makes sense that they can be used to boost credit rating fast.
Even when starting when scratch, you can build credit using facilities such as secured credit cards whose limit equals your deposit. Also, when paying for services such as rent and utilities use your credit card and let your spending count towards your score.