Introduction
A credit score is one of the most important factors, if not the most important factor that helps lenders decide whether to approve your loan request or not. Lenders will check your credit score to determine how creditworthy you are and what interest rate to offer you. Since this number can significantly impact your financial circumstances, it makes sense to spend some time making sure it’s the best it can be.
If you are wondering how to better your credit score, the good news is that it’s a somewhat straightforward process. All you need are some solid strategies and time.
How do you increase your credit score?
The good news is that most factors that affect your credit scores are within your control to change. So, here are five things you can do to take your credit score from fair to good.
1. DTI Ratio
A high DTI ratio would negatively affect your credit score whereas a low DTI would assure lenders that you aren’t a credit risk. If your DTI ratio is high, you should look into how you can pay off as much as possible. If you don’t have the money, you could try looking into debt consolidation loans. If that’s unsuitable for your finances, you can pay a little extra each month to reduce the numbers or make a few extra annual payments.
2. Repayments on time
Your credit scores are heavily influenced by your track record of timely debt repayments, as per your loan agreement. To enhance your credit score, it’s crucial to ensure that you never make a debt payment later than 30 days. Even a single day’s delay will result in a late fee, but it won’t be noted in your credit report. However, if you exceed the 30-day grace period, your credit score will be impacted. Remember, maintaining a consistent repayment schedule is key to building a positive credit history.
3. Report inaccurate information on your credit report
Get a copy of your credit report from all three national bureaus; TransUnion, Equifax, and Experian for free at annualcreditreport.com and verify them carefully. Do you see anything unfamiliar? Any inconsistencies or false information? If yes, you have the right to file a dispute for it.
While checking your reports, here are some things to keep an eye out for:
- Late or missed repayments
- Misreported collection
- Credit frauds
4. Credit utilization ratio
One other significant determinant of credit scores is the credit utilization rate. This rate is typically presented as a percentage and represents the outstanding balance on your credit cards. A credit utilization rate exceeding 30% can have a more adverse impact on your credit score. Conversely, promptly reducing high balances can swiftly enhance your score.
5. Restrict how often you apply for credit
Each time you apply for a new credit, lenders perform a hard check on your credit history which results in a 10-point drop in credit score. While a new credit application each year won’t hurt your score, applying for multiple loans in a short period isn’t a good idea since each inquiry will harm your credit score.
Conclusion
Improving your credit score from fair to good can have a significant impact. Though the difference may appear minor, it could translate into savings amounting to hundreds or even thousands of dollars. These savings can make a difference when faced with unexpected expenses like car repairs, urgent home repairs, or educational needs. Furthermore, a good credit score can open doors to better terms and conditions from lenders. Individuals with a high credit score have the leverage to negotiate lower interest rates, while those with a low credit score are often offered higher rates. If your credit score falls between decent and fair, taking small steps to elevate it to the good range can yield substantial savings in future financing, primarily through lower interest rates.
