What affects your credit score?
What affects your credit score may surprise you. Here are some tips to improve your credit score.
What affects your credit score may surprise you. For example, opening a new credit card can increase your credit score as long as you use it responsibly. On the other end of the credit spectrum, a large balance on your new credit card can rush your credit score lower.
That Federal Reserve’s G.19 Consumer Credit Report shows that Americans increased their revolving debt, which is considered an estimate of credit card balances, to $1.126 trillion in June 2022, a 16% increase from a year earlier. In May, revolving debt increased at an annual rate of 7.8%.
Coupled with an annualized inflation rate hit 8.5% in July, many are wondering what happened to their once-stellar credit scores. At times like these, it’s important to keep your score as high as possible. Excellent credit gives you options to help you save money while getting out of debt.
What has the biggest impact on your credit score?
FICO scores are used by 90% of lenders, so I’ll focus on that credit score here. There are five factors that affect your FICO score, with payment history having the biggest impact.
Here are the factors that make up your FICO score and the weight the scoring algorithm gives them:
— Payment history: 35%.
— Amounts due: 30%.
— Length of credit history: 15%.
— New credit: 10%.
— Credit mix: 10%.
Here are the ranges of FICO creditworthiness:
— Exceptional: 800-850.
— Very good: 740-799.
— Good: 670-739.
— Mass: 580-669.
— Poor: 300-579.
A high FICO score that is at at least a 760, get the lowest interest rates on credit cards, mortgages, and personal loans. So let’s look at what affects your credit score.
Which lowers your credit score
The recognition is counterintuitive, and that’s one of the reasons it’s difficult to understand what affects your score. For example, most believe that closing a credit card shows reluctance and that it should increase your score. As you will see below, this is not the case.
— High credit utilization. The reason credit card debt can lower your score is because it often translates into high balances. You have a credit utilization Ratio, which is the amount of credit you use compared to the amount available to you.
— Applying for multiple credit cards. Each time you apply for a credit card counts as one hard credit request. This can lower your score by up to five points. This is for everyone Application. Issuers see this type of frenzied lending behavior as a sign of financial distress. You might be chasing sign-up bonuses, but it still lowers your score and doesn’t look good.
— Sloppy payment habits. You now know how important it is to pay your bills on time. Do everything you can to make payments on time. Set up email or text reminders. Use money management tools that help you track expenses and payment due dates.
— Random closing of credit cards. Before you close a credit card, you should consider the impact it will have on your score. You will lose the Available Balance you had with that card and this may increase your usage rate. Keep your cards active unless you have a compelling reason to close them.
Which boosts your credit score
Sure, doing the opposite of what lowers your score is a good tactic. But there are also some sneaky strategies you can use to increase your score quickly.
— Increase your credit limit. Increasing the credit limit increases your available credit, which can decrease your credit utilization. The lower your ratio, the more it boosts your creditworthiness. Warning: Don’t try to ask your issuer for a higher limit unless you have an excellent payment history. Never draw attention to yourself unless you can stand the test.
— Make two payments in one month. Call your issuer and find out when they report your payment history to the credit bureaus. To lower your utilization rate, make an additional payment before the issuer reports your account balance.
— Pay more than the minimum payment. When you’re in debt, it’s difficult to think about paying more than you have to. But if your score (and cash flow) is low, you can build up the balance by increasing your monthly payment, albeit just a little. As your balance goes down, your score should go up.
— Get a new credit card. You can increase your score by getting a new card. The new credit limit increases your available balance, which reduces your utilization. Your goal with this card is to keep occupancy below 10%. You aim for the newly available credit to improve your score. It’s not for a shopping spree!
4 ways to get rid of debt
Once you have better credit, you have a new set of debt reduction options that can save you money. Consider it a just reward for the hard work you put in to improve your score.
— Credit card transfer. With a very good score, you can transfer your credit card debt to a balance transfer card. These cards offer an introductory interest rate of 0% per annum for a period that is typically between 12 and 20 months. You can pay out your credit interest-free during the introductory phase. Note that these cards usually have a transfer fee that ranges from 3% to 5%.
— Debt Consolidation Loan. If your score isn’t high enough for a credit card, consider credit card debt consolidation. This is a personal loan and you can get a fixed interest rate that is likely to be lower than the interest rates on your credit cards.
— peer-to-peer lending. This type of lending, also known as P2P lending, differs from borrowing from a traditional institution like a bank. Instead, P2P lenders provide a platform where you can borrow money from a person or company investing in loans. As with traditional lenders, the better your credit score, the better the interest rate you will get.
What not to do to get out of debt
Don’t reach for your 401(k) with the naïve notion that you’ll pay it back quickly. This is all the more important if your employer covers your contributions to a certain extent. Some of these plans do not allow you to continue contributing and receive Employer Match when you dive into the 401(k). But that’s just a problem with this strategy.
Do you know what happens if you don’t pay back your loan in five years? You have to pay penalties and fees. And if you lose your job, which is possible in a shaky economy, your 401(k) must be paid back by tax day the following year.
Don’t destroy the future to find relief in the present. Your best bet for getting out of debt is to choose a good strategy and stick to it.
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