How to Fix Your Credit Score in 2021
LOS ANGELES, February 23, 2021 (Newswire.com) - For better or worse, your credit score is one of the largest contributing factors when you want to borrow money. When lenders see a lower than average score, they may have reservations about giving you access to credit.
The good news for anyone who has struggled with a low credit score in the past is that your score can change based on your good financial decisions. But before you understand how to fix your credit score, it's important to cover what exactly it is and what contributes to that all-important magical number.
What is a Credit Score?
A credit score is a numerical value between 300 and 850 that reflects your riskiness as a borrower. A higher score indicates someone who is less risky and has a higher propensity to repay debts.
How is my Credit Score Calculated?
There are several types of credit scoring models, including FICO and VantageScore. Both use similar factors to come up with your credit score, but weigh them a bit differently. The more widely used FICO score breaks down the contributing factors for your credit score as follows:
- Payment history (35%): Previous payment history is a significant indicator of future ability to pay. This section is weighted most heavily and includes any missed or late payments and any accounts that may have been delinquent or gone to collections.
- Amount owed (30%): Lenders want to assess how much credit you're using vs. your total available credit. A lower percentage is viewed more favorably, and your credit score may suffer if you're using most or all of your available credit regularly.
- Length of history (15%): This includes the length of time your accounts have been open. Borrowers with a lengthier credit history tend to be looked upon more favorably.
- New credit (10%): It's best to only request new credit lines as you need them. It's a red flag for lenders and hurts your credit score if you request new credit frequently.
- Credit mix (10%): This examines the types of accounts you have, such as revolving debt like credit cards or installment loans like a personal, home, or auto loan. A greater mix indicates a less risky borrower.
To create your score, creditors report information related to these key areas to the three major credit reporting bureaus: Experian, Equifax, and TransUnion. Since your credit score comprises items tracked on your credit report, it's essential to review a copy of your report. Everyone is entitled to a free credit report from each of the three major credit reporting bureaus once per year.
How Can I Fix My Credit Score?
Once you have access to your credit report and review it, you can take the following steps to fix your credit score:
- Dispute any errors: If you notice anything askew on your credit report, such as accounts that you didn't open or payments tagged as missed when they were really on-time, open a dispute with the creditor and the reporting bureau. Correction of an error can result in a nice bump to your score without much effort.
- Pay debts on time: Maintaining a pristine payment history without missed or late payments is one of the best ways to maximize your score. You may want to consider a debt consolidation loan to decrease your overall interest rate and payment and increase the probability of making payments on time. If you've ever missed a payment due to simple forgetfulness, setting up autopay can also help you stay on track.
- Keep credit utilization within reason: Strategically pay down debts to keep the amount of credit you're using around or below 30% of your total available credit.
- Avoid closing accounts: Keep any existing lines of credit open, even if you use them infrequently. Suddenly closing all unused accounts could cause a brief dip in your score as the average length of history shortens.
- Only apply for the credit you need: Keep hard credit inquiries to a minimum by only applying for new lines of credit as you need them.
Notice: Information provided in this article is for informational purposes only. Consult your financial advisor about your financial circumstances.
Source: iQuanti, Inc.
Categories: Personal and Family Finances