A good credit score can open up a lot of doors for your family, even if you only want to save up for something small. You can’t create a contemporary bedroom or a bathroom remodel without a budget, but you definitely can’t get a mortgage, new car, or a personal loan without good credit. So let’s look at improving your credit score…
Why Does a Great Credit Score Matter?
While it’s true that a bad credit score can lock you out of lending products, such as loans or mortgages, a sub-par score can cost you hundreds of thousands of dollars over a lifetime.
Lenders consider scores of 619 or lower as incredibly high risk, which makes your interest rate skyrocket. A person with a 550 credit score will pay 7% more in interest than someone with a 650 credit score when they apply for a credit card. Delinquency rates can destroy your equity.
If you have an excellent credit score (750 or higher), you can find credit cards with an 11.99% interest rate. That’s 5% less than if you had a 650 credit score. You’d save 12% in interest if you raised your 550 score by 200 points, and you’d have access to more loan options from banks.
How to Improve Your Credit Score in a Few Months
It’s clear that raising your credit score is worth it, but where do you start? Here are 6 tips you can use to improve your credit score, so you’ll have more money in your family’s pocket.
1. Review Your Credit Reports Regularly
Your credit score is reported by credit bureaus, and these companies change depending on where you live. For example, the UK reports to Equifax, Experian, and Callcredit. It’s vital to ask for a free report once a year, so you can review what’s hurting your score or correct mistakes.
2. Avoid Hard Credit Pulls When Possible
A ‘hard pull’ occurs when you apply for a new line of credit, and they always show up on your credit report. For example, applying for a credit card can hurt your credit score, as this guide from SoFi shows. If a bank wants to pull your credit, ask if they can do a soft pull instead.
3. Aim for a 30% Credit Utilization or Less
A credit utilization ratio calculates how much credit you’re utilizing versus how much you have. If you have $30,000 worth of credit but you’re currently paying off $15,000, that means you have a 50% utilization ratio. Aim for 30% or less by paying down debt or increasing your credit limit.
4. Focus on Paying Your Bills on Time
Your payment history accounts for 35% of your total credit score, so you need to make sure you’re paying your bills on time and reducing your debts. To avoid late payments and interest fee charges, set up due date alerts or automatic bill payments from your checking account. This is one of the most significant ways of improving your credit score.
5. Take Advantage of a Thin Credit File
If you don’t have enough of a credit history to generate a credit score, consider applying for Experian Boost. This program collects financial data that isn’t typically on a credit report, like utility payments or banking history. You may even be able to report monthly rental payments.
6. Try Debt Consolidation as a Last Resort
Outstanding debts can really tank your credit score, but you can take advantage of a debt consolidation loan or credit union to pay them all off. Instead of multiple high-interest loans, you’ll only have to deal with one lower-interest loan. This tactic also helps your utilization ratio.
As you can see, improving your credit score IS doable, just follow some of these great tips!
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