An unfortunate prevailing truth, your credit score has a massive impact on your finances and spending power. But just because you have found yourself in a bad credit situation doesn’t mean you can’t recover. It is never too late to start practicing financial responsibility or taking control of your finances. Your credit score has very little to do with your income, but everything to do with how your finances are perceived.
Understanding your credit score
The first step in understanding your credit score is understanding how your score is calculated.
There are a number of factors that contribute to a credit score, such as:
Total number of credit lines
Payment history
Total amount of accrued debt
Debt-to-income ratio
Length of credit history
Types of credit
The most popular credit score model is the Fico Score, which takes the above factors into consideration, and places you on a scale of 300-850.
If your credit score is below 670, you are considered a high-risk consumer. Meaning, you may struggle to secure new lines of credit, be asked to pay higher down payments on financed purchases and receive higher interest rates on new lines of credit.
Have no fear, there are ways to quickly raise your credit score.
Your debt to credit ratio: keep it balanced
Most credit cards come with a maximum loan amount. This is the cap number that you could charge to the card before you are cut off. It’s rare, and not a good thing, to max out your card and not pay it off. Maxing out your credit care is a sure-fire way to find your credit score plummeting.
One of the tricks for showing that you are good with credit, and to watch your credit score rise, is to maintain a debt to credit balance utilization rate of less than 30%.
For example, if your credit limit is $10,000, make sure that at any given time you do not owe more than $3000 on the card.
Pay your balance, often
While it’s wonderful to pay your card off in full each month, it might not be the most optimized way to increase your credit score.
The credit companies check your balances once a month before adjusting your credit score. There is a chance that the day you are paying your card isn’t the right day to have a big impact on your credit score. One way to combat this is to make small weekly payments to your balance, this will keep the account balance low throughout the month, therefore contributing to a lower credit utilization rate.
Having multiple credit cards
It might seem counter intuitive, but your score will be better if you have multiple lines of credit open. Closing a credit card can have a negative impact on your score, so avoid doing so around times when your score might be looked at, like buying a car or moving into a new apartment.
On the opposite end of that, one easy way to increase your credit is by opening a new card. Your credit utilization rate is based on your entire open lines of credit. So, if you have one card with a limit of $10,000 but you owe $5,000 on that card, considering opening another card with a different issuer to lower your utilization rate.
Pay off debt
Debt is an anchor that continues to weigh down your finances, and your credit score. As long as you remine in debt, your score will always suffer. There are certain kinds of debt that are worse than others, for example massive credit card debt is much worse than student loan debt. Since loans typically come with much lower interest rates.
As you work through your debt, remember that payment history plays a huge role in credit scores. Make sure that you are hitting the payments each month, and slowly chipping away at that debt. As your debt goes down, your credit score will go up.
Baby steps make a huge difference
Small changes have the power to make an aggressive impact on your score. Learning how to better manage funds is the first step. Your score will fluctuate monthly, but if you follow the above steps, you are guaranteed to see your score rise.