From a lender’s perspective, you’re only as good as your financial history. If you’ve proven to be irresponsible with money in the past, then it’s assumed that you’ll be irresponsible in the future. And, for better or worse, your credit score is one of the primary ways lenders and creditors judge your fiscal responsibility.
What is a Credit Score?
Whether you’re adamant about checking it, or you’ve never so much as glanced at it, you have a credit score. Credit scores are provided by each of the major credit bureaus – Equifax, Experian, and TransUnion – with each using a slightly unique formula.
“The types of credit scores used by lenders and creditors may vary based on their industry,” Equifax explains. “For example, if you’re buying a car, an auto lender might use a credit score that places more emphasis on your payment history when it comes to auto loans. In addition, lenders may also use a blended credit score from the three major credit bureaus.”
Though every credit scoring formula is slightly different, there are typically five weighted factors that impact your score. They’re as follows:
• Payment history (35 percent)
• Credit utilization (30 percent)
• Length of credit history (15 percent)
• Credit mix (10 percent)
• New credit (10 percent)
FICO credit scores range from 300 to 850, with the following breakdown:
• Very Poor: 300-579
• Fair: 580-669
• Good: 670-739
• Very Good: 740-799
• Exceptional: 800-850
According to Experian, 37.2 percent of Americans – or nearly 2 out of 5 – have a very poor or fair credit score. Less than 20 percent have an exceptional rating. And if you fall into the former category, it’s time to do something about it.
Improving Your Credit Score
If you plan on taking out another loan in the future, applying for a mortgage, or even applying for a highly competitive job opening, your credit score could have an impact on your ability to accomplish your personal and professional goals. The good news is that a credit score isn’t carved in stone. There are plenty of proactive steps you can take towards boosting your score and enhancing your creditworthiness in the eyes of lenders. Let’s check out a few best practices:
• Regularly Check Your Score
You have a right to monitor your credit score. And while you don’t want to become obsessive about it, this should become a regular habit.
With a service like Credit Sesame, you can get free access to your scores (under the basic plan), as well as some advanced features that may help move you in the right direction when trying to increase a bad score.
• Stop Late Payments
Few things hurt a credit score quite like late payments. If you’re behind on credit cards or loan payments, the best thing you can do is catch up.
If late payments are simply a byproduct of having bills due before you get your paycheck, rearrange your credit card payment due dates (it’s really easy!) so they properly align with your paycheck schedule.
If you have a pretty decent history of paying on time and just happened to miss a couple of payments here and there, call up your credit card company and ask if they can forgive the late payment. They’re often willing to make allowances for people who have proven to be responsible in the past.
• Improve Credit Utilization Rate
Your credit utilization rate accounts for 30 percent of your score. It also happens to be one of the easiest to manipulate. This ratio is your credit limit divided by the amount you spend each month. For example, if you have a $10,000 credit limit and you spend $2,500, your utilization rate is 25 percent.
You can lower your utilization rate by (a) increasing your credit limit, and/or (b) lowering the amount you spend on credit.
• Avoid Closing Out Credit Cards
Finally, avoid closing out credit cards (even if you don’t use them any longer). Credit history and account mix play a role in your score, and it’s best to leave them on your record.
Clean Up Your Finances
Your finances aren’t something you can afford to be lazy with. The more you let things get out of control, the less likely you are to have favorable opportunities in the future. But by tackling your poor credit score today, you can begin the uphill climb towards financial freedom.
