Your credit score is one of the most important factors affecting your financial future. It impacts your ability to secure a loan, rent an apartment, buy a car, and even land a job. If you do get approved for a loan, you’ll likely get hit with high-interest rates and fees. The good news is your credit score can improve over time!
Understanding what makes up your credit score
Your credit score is a three-digit number that lets a lender know how likely you are to pay off debt if you take out a loan. There are several credit scoring models, but the most well-known is the Fair Isaac Corporation (FICO) score, which calculates your credit score using information from three credit bureaus: Experian, TransUnion, and Equifax.
As such, you have three FICO scores—one for each of the three credit bureaus. Your FICO credit scores will range from 300 to 850. A higher number means you’re considered less risky to a lender. Here are some guidelines to follow:
The factors that go into the calculation of your credit scores include:
- How often you’ve made on-time payments
- How much you currently owe on your debts
- The length of your credit history
- How much credit you have
- Any new credit you’ve taken on
Begin your credit score improvement journey
Want to know how to improve your credit score? There are several important steps you can take to get your credit score back on the road to credit recovery.
Step 1: Start establishing your credit
When you’re establishing credit, it’s tougher to prove you can pay back a loan if you don’t have a track record that proves it. Credit scores affect everyone at some point in their life. If you have either zero or poor credit, and you want to get a car loan or a house someday, you’ll need to improve or establish your score first. Here’s how to start!
Become an authorized user
When you’re an authorized user, it means that your name is added to another individual’s credit card. It’s important to make sure that person makes on-time payments. If they make sporadic payments or don’t pay their credit card bills at all, it could end up lowering your credit score.
Obtain a secured credit card
A secured credit card is a credit card backed by a cash deposit that you make. Your credit limit depends on how much you deposit. For example, if you deposit $300, your credit limit is $300. If you charge money to your secured card and don’t pay your bill, your credit card issuer can take the money out of your deposit.
Get a co-signer on a loan or credit card
A co-signer is a person who guarantees that they will pay off debt if the primary account holder cannot pay it back. You can get a cosigner for loans and a handful of credit cards.
Sign up for a rent-reporting service
Rent-reporting services like Rental Kharma can verify your successful rental payments and report them to the credit bureaus.
Step 2: Check your credit reports for errors
Everybody makes mistakes, and credit bureaus are no different. Your score can sometimes be negatively impacted because of inaccuracies on your report. For example, your report might list late payments that were actually on time, accounts that don’t belong to you, or other misinformation.
Make sure you check your credit report. Get in touch with Equifax, Experian, and TransUnion to dispute any errors. Only dispute true inaccuracies on your credit report. Never dispute correct information just because you want it removed or because it’s negative.
Step 3: Pay your bills on time
All bills are created equal when it comes to missing payments. Whether you’re dealing with credit card bills or your mortgage payment, every bill payment affects your credit score in the same way. That’s why it’s important to pay every bill on time, including utility, rent, and cable bills. Late payments remain on your credit report for seven years.
Step 4: Pay off debt
Paying off debt will increase your score, as it shows lenders you’re responsible with your available credit line. It will also lower the amount you end up paying in interest on your loans.
One way to start tackling your debt is by paying off your credit card debt first. Credit bureaus don’t consider credit card debt “good debt” so it’s best to get rid of it as soon as possible. Do your best to make multiple payments per month instead of just one. Another option is to make one payment per month and make sure it’s more than the minimum payment due.
Step 5: Keep balances low
Your credit utilization rate represents how much of your available credit is being used. It’s calculated by dividing your total debts by your total available credit. The general rule of thumb is that your credit utilization rate should be at or below 30%. An even better ratio is to keep your credit utilization under 10%. To calculate your credit utilization ratio, divide how much you currently owe by your total credit limit.
Step 6: Only apply for loans when necessary
Avoid applying for new credit cards or unnecessary loans. Every time you apply for credit, lenders will perform a hard credit check, which lowers your score by a few points each time. You should only have your credit pulled when you’re serious about making a purchase or opening an account. New credit cards can also tempt you to spend more, which will ultimately increase your credit utilization and your debt, putting a further dent in your credit score.
Step 7: Build your credit and budget your spending
If you’re looking for another boost to your credit score or you find that you’re having a hard time securing a loan, you can apply for a Credit Builder Loan from MoneyLion. This loan has no hard credit checks or competitive APR rates, and it gives you access to a portion of your funds right away! As you continue to make consistent payments, your score will begin improving over time.
Take even more control of your financial future by opening a RoarMoney℠ account to help you track your spending! You’ll have the ability to categorize your spending habits to help you budget like a pro. Plus, with RoarMoney, there are zero hidden fees and you can get your paycheck up to two days early, which will keep you from having to use your credit card and putting yourself in more debt.
Planning for the future
Remember that building your credit takes time, and it’s important to avoid any quick-fix schemes. If you’re dealing with things that have made your credit score drop, it’ll usually take longer to see a bump in your credit report.
Outside of obtaining loans, good credit means less debt, which will help you save for the future. Whether you’re saving for kids or want to take your dream vacation, it’s important to build a great credit score. If you understand how your score works, you can set your kids up for success and teach them how to build their own great credit scores, too!
When you follow these simple steps and take your financial responsibility seriously, you’ll be on your way to securing the best credit score yet!