How To Improve Your Credit Score Faster
How To Improve Your Credit Score Faster
Obtaining credit is a vital part of someone’s financial journey, and it’s not as scary as you think given that you know how it actually works. People acquire credit to get back on their feet, invest in business opportunities, get something in installments, and all other sorts of reasons. Understanding how credit works are one of the things a person must know. How to improve your credit score faster is even more important because it affects how you make smart financial decisions.
Understanding Credit Scores
To put it simply, a credit score is a numerical value used to determine a person’s capacity to manage debt. Credit scores typically range from 350-800 and the higher the number is, the better the chances of getting a loan. This scoring model was developed by Fair Isaac Corporation or simply known as FICO. Although there are other credit scoring models, it is the most widely used by financial institutions.
A credit score of 700 and above is considered good. It means that the borrower can receive lower interest rates depending on the credit company’s regulations. This means they can enjoy lower rates in the course of the loan’s life cycle. A score of 800 and greater is considered excellent based on the FICO Score Range which most credit companies use.
- Excellent: 800 to 850
- Very Good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
Someone’s credit score may also determine the amount of an initial deposit required to get a new loan. People usually get loan for a new gadget, housing, business opportunities and a variety of other reasons. Creditors frequently evaluate credit scores, especially when deciding whether to change an interest rate or credit limit on most credit cards.
How to Compute Credit Scores?
In the United States, there are three major credit reporting agencies which are Experian, Equifax, and Transunion. These agencies report, update, and store credit histories of consumers. While there are some differences in the information collected by these three credit agencies, there are five main factors evaluated when calculating a credit score. The borrower must take note of these factors especially if the goal is to increase the score faster.
1. Payment History
Payment history determines whether a borrower pays financial obligations on time, and it accounts for 35% of the credit score. This contributes to the largest chunk of a person’s credit score which means paying on time is a must.
2. Total Amount Owed
A borrower’s total amount owed contributes to 30% of the credit score and this is where “Credit Utilization Ratio” enters. It is defined as “the percentage of a borrower’s total available credit that is currently being utilized.” Lowering this ratio can help a borrower increase a credit score. It is best to keep this ratio at 30% or lower at all costs to get a higher credit score.
To compute for the credit utilization ratio, one should divide the balance over the credit limit. For example, if someone has a credit limit of $5,000 and a balance of $950, the ratio is at 0.19 or 19% which is considered good.
3. Length of Credit History
The length of credit history accounts for 15% of the borrower’s credit score. The longer someone’s credit history is, the less risky it is. This is because there is more data considered and therefore, it is easier to determine the credit history.
4. Types of Credit
The types of credit used by the borrower contribute 10% of the total credit score. This factor shows if a person has a mix of installment credits: from credit cards, mortgage, car loans or anything involving credit.
5. New Credit
The borrower’s most recent or new credit accounts for 10% of the credit score. This shows someone’s most recently opened credit accounts and the new type of credit applied.
How to Improve Credit Score Faster?
Now that the five main factors are laid out, the ways on how someone can raise their credit scores revolve around these which are easier to understand.
Pay Bills On Time or Earlier
This may come as a no-brainer, yet some people can overlook this. If you’re someone who recently had a rough patch of financial issues, this may be a problem but it can be remedied. Moreover, paying your debts on time avoids getting higher interest rates.
Here’s a Pro-Tip: Paying earlier than your due date and increasing the frequency of payments per month does wonder to your credit score. For example, you can pay your debt a week or two earlier or make payments twice a month.
Strategically Pay Down Debts
Paying debts on time is not enough, you have to strategically pay them. This is where the credit utilization ratio you learned earlier kicks in.
Here’s a Pro-Tip: Start paying those debts with a higher balance and higher ratio. Doing this can decrease a chunk of your debt, which makes paying smaller debts easier.
Raising Credit Limits
A borrower’s credit limit is the maximum allowable debt a financial institution grants for a certain credit line. So let’s go back to the credit utilization ratio again to understand more of how it works. Raising your credit limit makes the divisor bigger and thereby, decreasing your ratio.
For instance, if your former credit limit is at $5000, raising it to $7000 makes the ratio smaller. With a balance of $950, your ratio drops from 19% to 13.6% which is considered even better!
Work with a Credit Repair Service
Seeking professional help makes paying debts easy and fast because of the added training and experience. Working with a great credit repair service makes it even easier and faster.
Save yourself the stress, headache and time by consulting our credit repair professionals here at CreditPlanned. We guarantee to increase your credit score as early as 30 days, and we offer a FREE consultation.
Book a free consultation today or whenever our schedules meet.
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