Credit isn’t something that typically comes up during your average day. Since it’s not the type of information needed very often, many Americans don’t bother to monitor their score properly.
In fact, only around a third of Americans check their credit report yearly, and some never check it.
Why Is Credit Important?
While credit might not be a common factor in your everyday life, it can have a significant impact whenever it does come up. For example, it’s almost impossible to get approved for a mortgage with a low credit score, and buying a car can be challenging if your score isn’t up to the standards of the loan lender. Even if your loan application is accepted, you’ll almost certainly get less than desirable terms and conditions.
For these reasons, financial experts recommend checking your credit report at least once a year. That way, you’ll have ample time and opportunity to improve your score before you need to use it for an expensive purchase.
Fortunately, there are plenty of ways to improve your credit score, whether you're looking to repair a recent dip or start completely from scratch. Once you learn a little about credit, you’ll be able to create an effective strategy that can help improve your score.
What Is A Good Credit Score?
All credit scoring models use three-digit numbers to indicate the overall credit score of users. No specific number will guarantee the highest loan acceptance rates and best overall terms. However, the fundamental goal is to try and increase your score as high as possible.
Since it’s practically impossible to achieve a perfect score, these are the general ranges of possible credit scores and what they mean:
300 to 579: Bad
A score in this range will almost certainly be rejected for any type of credit application. Lenders are only interested in getting their money back and aren’t comfortable taking big risks on borrowers with a bad history of repaying debts. It’s going to take a lot of time and effort to repair a score that is this low.
580 to 669: Poor
Finding places that will grant you credit with a score in this range is possible. However, the interest rates will likely be very unfavorable, and penalty fees will be severe. You’ll need to be very careful when accepting the terms of any loan agreement. It might be better to improve your score a little bit first.
670 to 739: Fair
A score in the middle of the credit range indicates that you are a less risky borrower and will improve your odds of being accepted. Loans are more likely to be accepted, and terms will be more favorable. You’ll have more negotiating power and can shop around for the best deals and offers.
740 to 799: Good
Lenders will be much more comfortable granting a loan request from someone in this range. The odds of being accepted are very high, and the interest rates are typically very low. You’ll have much more negotiating power and will have your pick of where you want to open a new credit account.
800 to 850: Excellent
You’ll pretty much be able to instantly get credit anywhere you request it and receive the premier interest rates. In fact, a score this high might result in credit card companies and loan lenders coming to you with offers. Maintaining a score this high can be tricky, but the benefits are well worth the effort.
How Are Credit Scores Calculated?
- Payment History (35%)
- Amount Owed (30%)
- Credit History (15%)
- New Credit (10%)
- Credit Mix (10%)
Credit scores are often viewed as wildly complex mathematical algorithms that no one can understand.
The truth is that credit scores are the result of five separate criteria with various weights. Once you know how the formula works, it will be much easier to understand how you have the score that you do.
Here are the five main criteria that determine your credit score:
Payment History (35%)
The most important thing a lender wants to know is how likely you are to repay your debt on time. A history of falling behind on payments or defaulting on loans is the quickest way to drop your credit score and keep it low for a long time.
Just missing one payment by 30 days or more will negatively affect your credit score for up to seven years.
Amount Owed (30%)
The second most important factor in your credit score is the amount of money you owe compared to your overall credit limit. This is known as your credit utilization rate and offers a good general idea of your current financial health.
A high credit utilization rate indicates that you are using a lot of credit and maxing out your limits, which suggests that you might not be financially stable and can deter loan lenders from accepting your application.
Credit History (15%)
Credit history is one of the only factors involved with your score you don’t have direct control over. It will take several years to build up a history long enough that it will be viewed in your favor.
The key thing about this factor is that your oldest credit account, newest credit account, and the average age of accounts are all considered. That means that opening up a new credit account will hurt your score at first, but it will eventually age long enough that it starts to help your score.
New Credit (10%)
Loan lenders will perform a hard inquiry anytime you apply for a new line of credit. It will be marked on your credit report and hang around for around a year or two. In general, a hard inquiry will only impact your score by a few points at most.
However, having several of them in a short time would indicate that you desperately need a new line of credit. Lenders are looking for financial stability, and many hard inquiries suggest that you might be sinking instead.
Credit Mix (10%)
Having a diverse mix of credit is a good way to show potential lenders that you can handle various debts. Revolving credit (credit cards, home equity, etc.) is paid off monthly, depending on how much credit you use.
Installment loans (mortgages, car loans, student loans, etc.) are split into equal amounts and paid each month until the debt is settled. By maintaining several of each, you’ll signal to lenders that you are responsible for repaying any type of debt you incur.
6 Ways To Improve Your Credit
Improving your credit score is kind of like trying to lose some weight. Eating a salad for dinner isn’t going to suddenly give you six-pack abs, and your credit score won’t skyrocket overnight. If you want your score to increase, you will need to put in a lot of hard work and dedication.
Fortunately, there are several different things that you can do to help improve your score. Here is a list of six things that will help get you started:
Review Your Credit Report
The very first thing that you need to do is thoroughly review your credit report. It should give you a rough idea about why your score is where it is. By addressing this issue, you can help to create a personalized road map to a higher score.
Another thing you should be looking for is anything out of the ordinary. It’s not uncommon for mistakes to appear on people’s credit reports. Your score might be suffering because of an error made by a financial company, identity theft, or a general misunderstanding. You should immediately dispute any errors that you find on your report.
Pay Every Bill on Time
Nothing is more important to your credit score than making monthly payments on time. The other criteria that make up your score are essential, but your number one focus should be making every scheduled payment on time. Remember that a single missed payment can hurt your score for nearly seven years.
While that sounds like a lot of pressure, there is some good news about late payments. You have a federally mandated 30-day grace period to catch up on your missed payment. As long as you make your monthly payment within 30 days, your lender can’t legally report your payment as delinquent to any of the credit bureaus. You might have a few late penalties tacked on to your bill, but your credit score won’t be damaged.
Settle Your Debts As Soon as Possible
Budgeting your finances is vital so that you have leftover savings at the end of each month. However, savings will have to take a back seat when trying to improve your credit score. Instead of making minimum payments on your installment loans, you should throw in some of your monthly savings to settle your debt faster.
Don’t be surprised if your credit drops a few points when you pay off each loan. After all, you’ll have one less open account and have a reduction in your credit mix. While that might sound counterintuitive to your main goal, paying off installment loans will help reduce the amount of money you owe. Plus, you’ll have more money to help you with the next tip on this list.
Keep Your Credit Utilization Rate Low
You must use your credit cards often to keep the accounts active. Credit card companies can deactivate cards that haven’t been used in a while, which will hurt your credit history. However, you’ll need to find a delicate balance between keeping them active and maxing them out.
Ideally, you should keep your credit utilization rate around 10 percent of your total credit limit. That means if you have three credit cards with a total credit limit of $15,000, you should try to keep your monthly balance under $1,500.
It’s okay if you occasionally go over this amount, but you never want your credit utilization rate to exceed 30 percent.
Request a Higher Credit Limit
A higher credit limit will make it much easier to keep your credit utilization rate low. Opening a new credit card account will require a hard inquiry and lower the average age of your credit history. Before doing that, you should at least try to see if you can get a higher limit on your current credit cards instead. Even a few hundred dollars can help keep your credit utilization rate under 30 percent during tough times.
The most important thing to remember about this option is to ask whether they’ll need to pull your credit. A hard inquiry can hurt your score, so it’s best to avoid that for the time being.
You might not be able to get a higher limit increase, but the goal is to increase your score right now, and a hard inquiry will only hurt it.
Download Yotta
Using the Yotta Credit Card is an easy way to cover most items on this list. For starters, there is no credit requirement for using a Yotta Credit Card, and no hard inquiry is necessary. You’ll be able to start from scratch with Yotta and hit the ground running because Yotta reports every swipe to all three credit bureaus. That means every purchase will help you increase your credit score slowly.
Another benefit is that your Yotta account balance will be your credit limit, so you can’t run up massive debt. You won’t have to worry about the credit utilization rate or paying a ridiculous interest rate when making your next payment.
In fact, you won’t even have to worry about making your payments because Yotta will automatically transfer the funds in the background to pay your balance. Naturally, you’ll still get all the credit (pun intended) for making the payment.
Build Your Credit the Easy Way
Improving your credit score can seem like an impossible task at times. Making payments on time, reviewing your report, paying off debts, and keeping your utilization rate low can be challenging even in the best of times. With enough hard work, you’ll be able to improve your credit score and reach a range that is more beneficial for you.
On the other hand, using Yotta can help to speed up the process. The Yotta Credit Card is an excellent way to build up your credit and doesn't come with a potential for negative side effects.
All that you’ll need to do is keep money in your account and remember to use your card. The rest will be taken care of for you. As an added bonus, you’ll get an extra ticket in each week’s $10 million sweepstakes for every $5 you spend with your Yotta Credit Card.
Visit Yotta today so you can make your first deposit and enter it into the next drawing. All it takes is a little bit of luck for you to find yourself with a life-changing amount of money.
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