Friday, May 27 2022

Raising your credit rating is important, and aiming for a perfect score makes you a much more attractive customer to banks and other financial institutions.

This gives you access to the most exclusive products, which have much lower interest rates, saving you a lot of money in the long run!

How your credit score is calculated

There are three major credit reporting agencies: Experian, Equifax, and TransUnion. They create your credit score and provide your loan report card. Just like school, you are evaluated on how you manage your credit on a day-to-day basis and how risky you are to lend.

The higher your score, the more power you have in negotiations. This can be anything from renting a nicer home, to getting better rates on insurance, utilities, or buy a house.

Credit bureaus take various factors into account when calculating your score, including:

  • Use of credit and amounts due
  • Refund history and late payments
  • Collections and bankruptcy
  • Types of credit
  • New credit applications
  • The number of accounts held

There is some financial information that will not be reported, including the following:

  • Utilities (unless you go into collections)
  • Rent (unless you go to collections)
  • Child support (unless it goes into collection)
  • Property and income taxes (unless you go into collection)
  • Gym memberships
  • City bills such as parking or medical care
  • Insurance (unless you go into collection)

However, here is a list of what will appear on your credit report:

  • Any secured or unsecured line of credit
  • Installment loans
  • Mobile phone contracts
  • Loans for motor vehicles
  • Student Loans
  • Credit shop or financing agreements

Payment history accounts for around 35% of your total credit score, so this is the most important factor to consider. Late or missed payments can dramatically decrease your score.

Credit usage, length of your credit history, hard credit check and new open accounts and credit diversity also affect your score.

How To Increase Your Credit Score

If you are using Experian, your credit scores can be divided into these categories:

  • Excellent = 781 – 850
  • Good = 661 – 780
  • Fair / Medium = 601 – 660
  • Poor = 500 – 600
  • Very poor = 300 – 499

It is estimated that 61% of Americans have a “Good” rating or higher. But, if yours is lower, there are a few ways to increase your score.

Here are some tips to quickly boost your credit score:

  • If you make payments to your bank, set all payments for automatic withdrawal – this increases your internal credit score and gives you better loan rates.
  • If you can’t pay everything, always pay the debts that are reported to the credit bureaus first, then pay the rest when you can.
  • Always having two credit building accounts – a revolving account and an installment loan – can be a credit card and a student / car loan.
  • Try building two years of credit history before applying for a mortgage as this is preferred by most lenders.
  • If your credit limit is raised, it doesn’t mean you should spend more.
  • Credit bureaus only update monthly, something bimonthly, so it may take some time for your score to update after you make payments.
  • Avoid late payments: Most lenders don’t want late payments in the past 24 months.
  • Pay collections on your accounts first – if you want to dispute, do so later. When you pay for this, make sure you get a written confirmation.
  • Imperfections remain on your account for 7 years – negative credit does not fall from your account for 7 years.
  • Try to keep your credit accounts active, even if it means spending money on everyday items and then paying them back the same day.

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