How Credit Scores Are CalculatedVarious credit unions and financial institutions calculate your credit with a mathematical algorithm, which they apply to one of your three credit reports. Note that there isn’t one universal algorithm adhered to by all lenders, credit card companies, and financial institutions. They have their own ways of assessing your credit history and usage ratios.
The most commonly utilized ranking system is the FICO score. It incorporates the 300 to 850 scale discussed earlier. Factors such as your payment history on loans and credit cards are weighed when compiling your score. Your accounts and revolving credit are also assessed in this manner. So, what’s your FICO® Score? You can find out now with the purchase of your Experian Credit Report for $1 with enrollment in Experian CreditWorks.
Steps to Boost Your Credit ScoreSo owing to some challenging circumstances, your credit’s taken a hit and you score’s bordering on the 500s. Or, alternatively, you’ve got an unblemished record but you’re looking for ways to improve your already stellar credit. Either way, read on for recommendations that will improve your credit score no matter the sitiuation.
1. Pay All Bills on TimeCreditors derive a reasonable indication of your future payment performance by how reliably you’ve paid bills in the past. Keeping up with your accounts and paying above the minimum will favorably impact your capabilities as a borrower. Conversely, being late on payments is an overall bad look to most creditors. Your payment punctuality must go beyond your student loans, mortgage, and auto loans—extending to rent, utilities, and your phone bill. As such, it’d be wise to set up automatic payments wherever possible. Because on-time payment history is one of the most important factors in your credit score, companies like Experian allow you to add additional on-time payments to your credit report by linking your bank account—for free. That means you can get credit for bills like Netflix®, phone and utilities. According to Experian, users who received a boost improved their FICO® Score by an average of ~13 points. Get Experian Boost today.
2. Keep Your Balances LowCreditors prefer low credit utilization ratios. They calculate this percentage by adding all your credit card balances and dividing the sum by your total credit limit. Most experts suggest 30% ratings or less because it shows creditors you haven’t maxed out your credit and are a responsible borrower who manages their debts. One way to ensure an ideal utilization ratio is by keeping your balances low by paying off your debts.
3. Get a Secured Credit CardSuppose you can’t obtain a traditional unsecured credit card due to your low or lacking credit. In that case, a secured credit card provides a viable alternative. It removes the risk for the issuer because you pay a security deposit. Provided you need to improve your credit, this allows you to prove yourself as a reliable borrower. You can now pay off your balance on time when it otherwise wouldn’t be available.
4. Raise Your Credit LimitsRaising your credit limits on one or more of your credit cards can help reduce your utilization ratio (remember that creditors want you below 30%). Note this option isn’t for someone who struggles with making payments—in fact, it could end up being detrimental. Still, as long as you’re confident that you’ll successfully manage your debts, call your credit card company and ask them to raise your limit. Be ready to negotiate with a number a little bit higher than your desired amount.
5. Retain Your Unused Credit CardsClosing unused credit cards may negatively impact your FICO score because it might increase your utilization ratio. You’ll owe the same amount of money without the same number of open accounts. As long as these untouched cards don’t cost you any annual fees, keep them open as a helpful utilization ratio buffer.
6. Keep an Eye on Your Credit ReportsHabitually review your credit report if you’re intent on building your score over the long haul. You can’t fix a problem if you can’t see it. Receiving regular reports will keep you informed about potential mistakes you’re making, protecting your score. Moreover, many financial products augment these reports with helpful suggestions on how you can improve your credit.
Final ThoughtsIs your credit score closer to 500 than it is 850? Well, there’s no need to fret. When you implement our suggestions, your FICO score will eventually recover. There’s no magic involved—just a little bit of discipline. Just keep in mind that it’s a marathon and not a sprint. It will take time for your score to finally reflect the positive changes you’ve made.
Your credit score can have a big impact on your financial future. Sign up for Experian to get your credit score and credit report for free! Join millions of other Americans and get the tools you need to help understand, manage, and master your credit—in under 3 minutes. Checking your credit score with Experian won’t hurt your score.