Credit is the short term definition of financial trustworthiness.
When looking to make a financial move, your credit is going to play the biggest role in whether or not the lender is willing to give you the loan.
Basically, consumers use credit as a means to obtain services and goods today, but divide the cost over an extended period of time.
This allows people to afford more expensive items than they would be able to otherwise.
These items could include automobiles, homes, education, home improvements, etc. These purchases retain value beyond the time it takes to repay the loan, which makes them great investments.
But if you have a sub-par credit score, you shouldn’t expect favorable lending terms on these items.
We’ll give you 11 must know tips on how to raise credit score fast so you’ll be prepared to make the financial moves you want.
- The 4 Types of Credit
- Your FICO Score Breakdown
- How Does Your Score Compare?
- How Much Is Your Credit Score Costing You?
- Check For Errors
- Dispute The Errors
- Good Credit Doesn’t Outweigh Past Credit Mistakes
- Be Careful When Paying Off Old Debts
- You Can Remove Unpaid Negative Items From Your Report
- You’re Entitled To A Free Credit Report
- Keep Your Credit Card Balances Under 35%
1. The 4 Types of Credit
With revolving credit, you are given a maximum credit limit, and you can make charges up to that limit. Each month you carry a balance (or revolve the debt) and make a payment. Most credit cards are a form of revolving credit.
While they often look like revolving credit cards and are used in the same way, charge accounts differ in that you must pay the total balance every month.
Your agreements with service providers are all credit arrangements. You receive electricity, cellular phone service, gym membership, etc., with the agreement that you will pay for them each month. Not all service accounts are reported in your credit history.
With installment credit, a creditor loans you a specific amount of money, and you agree to repay the money with interest in regular installments of a fixed amount over a set period of time. Car loans and mortgages are two examples of installment credit accounts.
2. Your FICO Score Breakdown
Whether you are applying for a credit card or looking to buy a home, lenders will want to know what kind of risk they are taking by lending you money.
Your FICO credit score is what most creditors will use to determine this risk.
There are several factors that affect your score on this scale.
Here’s a percentage breakdown of your FICO score:
Payment History (35%)
Lenders want to know if you have actually paid back your credit accounts in the past. Now a few late payments aren’t going to destroy your score. But if you defaulted in the past, it will appear that you are more likely to default again. Alternatively, things such as bankruptcy, tax liens, judgments, lawsuits, and foreclosures will seriously affect your score in a negative way.
Amounts owed (30%)
Your percentage of available credit is also very important. Owing money doesn’t always mean you will have a lower score. But if you owe $4,500 on a card with a $5,000 credit limit, it’ll appear like you’re overextending yourself. That’s when lenders start to worry about you making late payments, or missing payments all together.
Length of credit history (15%)
Your FICO score examines this portion with three different sets of criteria. (1) The age of all your accounts (2) the length of specific accounts and (3) how long it has been since you used each account.
New credit (10%)
When looking at a credit report, opening too many credit accounts in a short period of time appears like a very large risk. It’s basically like telling lenders, “I am desperate for money,” or “I am frivolous with my spending.” Inquiries, new credit accounts, and time play a huge role in this portion of your score.
Credit Mix (10%)
In this portion of your score credit cards, retail accounts, installment loans, mortgages, and finance loans are all considered.
You have 3 credit scores, one from each of the three major bureaus. New and old information is constantly being added or removed, so your credit score is expected to vary depending on when you look at it.
3. How Does Your Score Compare?
The average difference in scores between the highest and lowest of your three FICO scores from the three major bureaus is 60 points.
This is the result of each of the credit bureaus having different items on their report, which may be correct, incorrect, or are not reported in full compliance with credit law.
Under 500 = The Lowest Credit Category
It’s usually a sign of bankruptcy, foreclosures, collections, charge-offs, etc. It’s very difficult, if not impossible, to obtain credit. If you are able to find credit, it will require large cash deposits or equity. If you accept the offer, it will force you into paying ridiculous interest rates as well.
500-599 = Bad Credit
Typically due to late payments, charge offs, medical collections, etc… If you get financing, you are then required to pay large closing costs. You will also be charged very high interest rates due to the risk the lender undertakes in lending you money.
600-649 = Fair Credit
You will find unfavorable terms in financing, but there are more sources made available to you than the previous category.
650-700 = Good Credit
If your score is between 650 and 700, you have good credit. However, with today’s tighter lending standards, there are less products available to meet the unique needs of borrower. You may be forced into agreeing to terms that you would otherwise not consider.
700-719 = Great Credit
Lenders want to loan you money. You are a good credit risk and will receive favorable financing terms. However, with today’s tighter lending standards, you may not have as many options for low documentation type loans without providing a substantial amount of equity upfront.
720 or higher = Excellent Credit
This is the category where opportunities arise with any type of financing that may be available. This should be the goal of every consumer.
It may take some time and discipline, but everyone can eventually achieve this score if equipped with the proper knowledge.
4. How Much Is Your Credit Score Costing You?
When it comes to your credit score, if you aren’t making the appropriate financial decisions to keep it as high as possible, you are playing with fire that could cost you hundreds of thousands of dollars.
Recently, lenders have had to become more selective about who they loan to. As a result, the difference someone will pay with bad credit versus good credit is substantial.
I’ve created a scenario to contrast the situation between two women who make the same financial purchases and moves over the course of their lives.
They are teachers at the same school; they live in the same area, and have similar incomes and families.
The only difference between the two women is their credit scores.
Sally has a FICO credit score of 740 and Sara has a 620.
Sally maintains her good credit by:
- Never maxing out her credit cards
- Applying for credit sparingly •
- Paying her bills on time
Creditors value this type of borrowing and reward Sally by offering her more credit, and increasing her credit limits which permits her to spread her balances across several cards.
Sally knows how important her credit score is and takes the necessary steps to protect it.
Alternatively, Sara’s poor credit is a result of:
- Missing one semester of work unpaid because of a medical issue
- Sometimes maxing out her cards
- Sometimes doesn’t make her payments on time
This type of financial behavior discourages lenders to extend more credit.
Sara tends to spread her balance across fewer cards than Sally resulting in a lower ability to negotiate lower interest rates.
Sally and Sara borrow the same amount of money over their lifetimes but end up spending way different amounts because of their credit scores.
5. Check For Errors
Of course maintaining your credit is your responsibility. But sometimes when your score slips, it’s not always your fault.
What if you were forced into making a choice between eating or making your car payment?
What if you were laid off from your job, a medical emergency occurred, or some other personal crises prevented you from making a timely payment?
Should you be forced to pay the consequences for the next 7 to 10 years, serving a credit prison sentence?
The current system does not give you the opportunity to defend yourself before inscribing your credit report with negative and damaging information, even if it is not yours!
Their perspective is that YOU must prove to them how the negative information on your credit report is incorrect, invalid, erroneous, or otherwise, non-verifiable before they will remove it off your record.
Why did they not give us a chance to defend ourselves before they place damaging information on our report?
Because consumers rights cost them money!
The sole focus of credit bureau companies IS profit with YOUR credit file being the credit bureau’s product! The credit bureaus have no government affiliation (except for spending millions on lobbying efforts).
These private corporations sell your personal financial information to anyone that will pay for it – who, as a rule, accepts it as gospel even though it has been proven all too often that mistakes happen! Creditors then reciprocate by giving back to the bureaus any information they may have on you.
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— Get Out of Debt (@getoutofdebtcom) October 1, 2018
6. Dispute The Errors
If you do find an error in your credit report, it is super easy to report it. However, getting results from the credit bureaus as a “layperson” is super difficult and infuriating.
The Federal Trade Commission receives more complaints against the credit bureaus than they do any other type of business.
Remember that the credit bureaus are primarily interested in protecting their profits.
And guess what?
Investigating consumer disputes eats away at these profits. So the bureaus are going to do everything in their power to stop you from restoring your own credit.
7. Good Credit Doesn’t Outweigh Past Credit Mistakes
So what if you have a bankruptcy on your credit report from 5 years ago, but you’ve made great decisions since then? Will your recent good work make up for your past mistakes?
Unfortunately, the slightest negative remark on your report will hurt your chances of being approved by a lender.
You need to realize that an approval is almost never in the hands of a human sitting at a desk across from you. It’s more likely that your approval is derived from a computer looking to achieve a point total.
Generally, even having just one bad mark on your credit report will result in a declination.
8. Be Careful When Paying Off Old Debts
It’s only logical to think that if you pay the delinquent accounts on your report, that your credit score will increase. Unfortunately, this isn’t always the case.
We know that an item will remain on your credit report for 7 years. By paying on an item on your report, you’re essentially resetting the clock to the beginning of the 7 years.
Even if you paid on Year 6, Day 364, the item will be on your report for an additional 7 years from the date of payment.
Ironically, a paid in full negative item is generally not looked at any more favorably than an unpaid negative listing. So, you really won’t be benefiting by paying the old debt off. In fact, you are most likely making it worse.
9. You Can Remove Unpaid Negative Items From Your Report
It’s important to know that removing an item from your report DOES NOT eliminate your obligation to pay that debt to the creditor. It just simply makes the derogatory item invisible to a potential creditor who is evaluating your report.
However, leaving an item unpaid makes you run the risk of the creditor taking further action against you like selling your debt to a collection agency.
If they do this, it’ll result in further damage to your credit score.
But, you’ll receive ample advanced notice of these proceedings. So you’ll be able to settle the matter before the damage to your credit appears.
10. You’re Entitled To A Free Credit Report
Consumers are able to receive a free copy of their credit report once a year from each of the three major credit bureaus.
In cooperation with the Federal Trade Commission, Equifax, Experian, and TransUnion provide free access to your annual credit report at annualcreditreport.com.
Take advantage of this offer and request a copy of your credit report every year. Comb through it for errors, and take the necessary actions to fix them.
11. Keep Your Credit Card Balances Under 35%
If you want to keep your credit score up, keep those credit card balances down. We recommend that you never exceed 35% of your total credit limit, but the lower the better.
High credit card balances across the board means lenders will be less likely to give you the financing you want or need. High balances are a red flag for lenders that you’re about to default.
The credit bureaus aren’t looking out for your well-being. And guess what? The banks aren’t either. It’s not your spouse or your family’s responsibility. Your credit score is YOURS and yours alone.
It’s up to you to make the moves you need in order to see an improvement in your score. After all, your credit score is an indication of your financial trustworthiness. So by making good decisions now, you’ll be giving yourself the upper hand on your financial future.
What have you done to see the biggest improvement in your credit score? Let us know in the comments!