Before looking to buy a home or apply for a personal loan, the first thing you should do is check your credit.
The average American’s credit score is 695 and about 45 percent of Americans have a credit score under 700. This will directly affect how much you will pay over the life of a loan, with a higher score meaning the less interest you will pay.
How can you improve your score? Here are some strategies for boosting that all-important number.
For Borrowers with No Credit History
Forty-five million Americans have no credit score, according to the Consumer Financial Protection Bureau. This comprises people who don’t have a credit history on file with the credit bureaus and those whose history is so limited they can’t get a score.
Sonya Smith-Valentine, president of Financially Fierce, a financial education company in National Harbor, Md., says consumers are “credit invisible” for several reasons. Some rely on cash or prepaid or debit cards because” they’ve been so terrified of getting into debt, but then realized that in some ways they’ve actually caused harm,” when it was time to get a mortgage, she says. Younger people also are more likely to be credit invisible because they haven’t had time to build credit. If you’re in this group, there are several ways to build your credit:
Get a secured credit card: A secured credit card allows consumers with no credit history or poor credit to establish a line of credit by using a deposit as collateral. Apply for a secured card at a bank or credit union. If you’re approved, you’ll need to make a deposit to get the card, which will be the same amount as your credit line. Just make sure your secured card credit card reports to the major credit bureaus, Smith-Valentine says, which will help you build a positive credit history.
Become an authorized user on a relative’s credit card: This is a great option for college students and young people. If your spouse or relative is listed as the primary account holder on a credit card, he or she can add you as an authorized user, giving you privileges to make purchases without being legally responsible for the account’s activity. However, be careful. Any late or missed payments could jeopardize your efforts to establish good credit.
Get a credit builder loan: These small loans, which typically range from $500 to $1,000, let you borrow money from a credit union or a bank at a lower interest rate. The money is deposited into a savings account that you can’t access until you repay the loan. You make regular payments on the loan and once it’s paid off in full, you can access the funds in the savings account.
For Borrowers with Fair or Bad Credit
If you have fair or bad credit, you can use the same strategies mentioned above, but it’s also critical to check your credit report and break bad money habits.
First, ensure there isn’t any fraudulent activity on your report that may affect your score. If so, report these discrepancies as soon as possible to one of the credit reporting agencies — Equifax, Experian or TransUnion.
“If there are issues that are going on with your credit that you truly believe are a mistake and the credit bureau won’t fix them, I always tell people to reach out to Consumer Financial Protection Bureau,” Smith-Valentine says, adding that consumers also should contact the National Association of Consumer Advocates, a network of consumer attorneys who defend consumers when they go after one of the credit bureaus or a company that has reported fraudulent activity on their report. “You can sue them and that other company will have to pay the consumer’s attorney fees.”
However, if you have late or missed payments, high-interest rate debt and high credit utilization (using too much of your available credit), this will hurt your score. According to TransUnion data, most Americans are in the latter group — a majority of consumers use more than 50 percent of their available credit, while millennials and Gen X-ers have the highest credit utilization rate at 80 percent.
Your credit score is comprised of several components: Your payment history (35%), current debts (30%), length of your credit history (15%), new credit applications (10%) and your credit mix (10%). Set up payment reminders or enroll in automatic payments to avoid late payments. If you can’t pay within a given month, contact your credit card company or bank to see if there’s any flexibility with the due date or if they’d be willing to waive reporting for that 30-day period.
Also minimize high-interest rate debt, such as credit cards. However, if this isn’t feasible, consider consolidating your debt into a personal loan. Borrowers can increase their credit score by an average of 40 points when they consolidate $5,000 or more of credit card debt into a lower interest rate personal loan. This allows you to pay off debt faster, but compare loan rates and payment terms before choosing a lender.
For Borrowers with Good Credit
“What people don’t realize is that as your score goes up, it gets harder and harder to crack” the 800-mark, Smith-Valentine says.
If you have good credit, focus on lowering your debt-to-income ratio to under 30 percent, make every payment on time, get rid of debt and get your payment cycle to match up with your credit card company or bank’s reporting to the credit bureaus.
Troy Dennis, head of credit card product management and acquisition at TD Bank, also says consumers with strong credit should “set aside some time to review the lines of credit that you have open. Ensure you’re aware of any cards that no longer have a balance and plan to use them occasionally, ideally, every two to four months, in order to keep them from closing.”
“Your credit score can be impacted if a card closes since a large portion of a consumer’s credit score is determined by their length of credit history — forgetting about an old card and allowing it to close could have a negative impact on your score,” Dennis adds.
A good credit score is key to your long-term financial health. It affects everything, including getting a better home loan rate, your credit card limit, approval for apartment rentals, and interest payments on personal and car loans. Follow our tips to improve your score or speak to a financial professional who can help you get your finances in better shape.
How to Handle Your Debt
Consolidation can be an important way to pay down your debt faster.
Some lenders say that by consolidating $5,000 or more of credit card debt into a personal loan — an installment loan — some borrowers can increase their credit score by an average of 40 points. This, of course, depends on many factors.
To learn more about personal loan offers and what credit scores they require, see our reviews of 24 different personal loan lenders.
Credit scoring agencies look at a range of factors in determining your credit score. The most important of which is paying off your balances and keeping healthy ratio of credit used to credit available — generally at or below 30 percent.
The main credit rating agency Fair Isaac Corporation or FICO considers the different types of accounts you use, such as credit cards (revolving) and installment loans (personal or student loans).