A credit score is a numerical representation of your creditworthiness in the eyes of lenders. It is a three-digit number ranging from 300 to 850. Lenders evaluate it to determine how likely you are to make timely payments on your loan.
Whether you’re applying for a mortgage or an auto loan, your credit score significantly impacts your interest rates, monthly payments, and loan terms. In simple terms, the higher your credit score, the better your loan terms.
Most lenders require you to have a minimum credit score of 620. If yours is below, don’t panic. Here are four simple things you can do to improve your credit score:
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Get Copies of Your Credit Report
First things first, get your credit report to have a clear idea of where you stand. Fortunately, federal law allows you to obtain a free credit report once a year from the three major credit bureaus — Experian, Equifax, and TransUnion. Some credit card issuers and lenders also provide credit reports on their portals, but this could be costly.
Remember that credit reports can have inaccurate information. The good news? You can easily get it fixed. Reach out to the appropriate credit bureau and the company that provided the inaccurate information. Getting your credit report and fixing any mistakes is the easiest way to improve credit score.
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Make Payments on Time
Lenders like AmeriSave take a thorough look at your payment history, analyzing how many payments you’ve made on time and how many have been made after their due dates. According to the Fair Isaac Corporation (FICO), your debt payment history makes up 35% of your credit score. This is why it’s important to pay bills on time.
Start by making a detailed list of all your debts, especially the ones with a high interest rate. Set up calendar reminders along with minimum payment amounts.
Did you know that if you make a payment 30 days late, it stays on your credit report for seven years? Cutting unnecessary expenses and tracking your spending might seem like a lot, but it can steadily increase your credit score.
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Consolidate High-Interest Debts
Another common way to improve your credit score is to consolidate high-interest debts. It involves combining all your high-interest debts and replacing them with a single, new one. This new debt might come with a better interest rate.
There are numerous ways to consolidate debts. For instance, you can take out a personal loan with a low interest rate or get a second mortgage in the form of a home equity line of credit (HELOC).
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Keep Credit Card Balances Low
Using credit cards for minor and major expenses is pretty convenient. But the bills begin to accumulate, they not only impact your emotional well-being but also damage your credit score.
No matter how high the credit limit is, keep the balance as low as possible. Experts recommend keeping your credit utilization under 30% to avail favorable loan terms.
