Your credit score is a vital aspect of your financial health. It shows lenders that you are very responsible when it comes to using credit. If you have a poor credit score, you may find it hard to get a mortgage or credit card. It may also make you get loans with higher interest rates, hence making the loans more expensive to repay.
FICO defines a bad score as 620 or below. If you have a fair or bad credit score, you may be wondering how to improve it. Well, fortunately, there are steps you can take to start increasing your credit score. These steps include:
- Check your credit reports
Before you start finding ways to improve your credit score, you must know your current score to know where you are starting from. Since your credit score is based on information from your credit report, the first place you should check is your credit report. You can get your credit report from the major national credit bureaus.
A credit report is a record of your repayment history, credit, and debt management. It may also contain information about your accounts that have gone to collections. However, if you find any error in your credit report, the federal law allows you to dispute the errors by writing to the relevant credit bureau.
- Pay your bills on time
When lenders review your credit score, they want to see how reliable you pay your bills. That’s because late payment is usually considered a good indication that you will make prompt repayments. You can significantly improve your credit score by paying all your bills on time every month as agreed. Late payment or settling an account for less than what you initially agreed to pay can negatively affect your credit score.
You’ll want to pay all your bills, including credit card bills, auto loans or student loans, rent, utilities, etc. on time. It’s also a good idea to use tools available such as calendar reminders or automatic payments to help you make payments on time every month.
- Pay off your debts
Paying off your debt is also another great way of improving your credit score. FICO bases 30% of your credit score on the “Amounts Owed,” this is why you must pay off your debts. There are various forms of debt settlement. You can make minimum payments on other cards and use the remaining amount to pay a high-interest credit card or talk to your lender about how you can settle the debt.
- Only apply for a credit card when necessary, and shop for the best rates on loans and credit cards
You should only apply for new credit if you really need it. Applying for a credit card that you’ll only use once or twice when you could just use the one you currently have, might not be a good idea. Applying for and getting a number of new credit cards within a few months can really affect your credit score. When you want to apply for a loan, you need to shop around for banks with the best rates.