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If you’re considering buying a home, car, or even taking out a personal loan, but your credit score isn’t optimal, you’ll need to understand your credit score, learn how it’s calculated, and take steps to improve your credit score.
Below is a list of DIY tips to improve your creditworthiness.
1. Understand the factors contributing to your credit score
These factors are weighted to determine your credit score as follows: Payment history – 35%, Amounts owed – 30%, Credit history – 15%, Credit composition – 10% and New credit – 10%.
Knowing this profile will help you identify areas for improvement. For example, making car payments on a timely basis can influence both payment history and the amount owed, greatly impacting your score.
2. Check your credit report regularly and dispute any errors
The three major credit reporting agencies, Equifax, TransUnion and Experian, are mandated to provide 1 free annual report. Additionally, you can do a soft credit check once a month.
Since the credit report is used to determine your credit score, it is advisable to check it for any errors. If you discover incomplete or inaccurate information, there are ways to challenge errors and make the necessary corrections.
3. Get credit for things you already do
Fortunately, it is possible to include your monthly bills like rent on your report. This will increase your credit score and lenders can use it when reviewing your future credit applications.
If you are already paying rent, speak to your landlord and confirm if they report your payment to any of the offices. If not, decide to go either through your landlord or through rent payment agencies.
4. Open a secured credit card
You must use credit to establish your credit score. The best way to do this, especially if you have no credit history, is to sign up for a secured credit card.
Most importantly, make sure you make your payments on time and keep your balance low, around 10% of available credit if possible.
Tip: Get a credit card that reports to all 3 bureaus to get a complete credit report.
5. Become an authorized user on someone else’s account
Ask a family member with an excellent payment history to sign you up as a secondary account holder on their credit card. This is one of the best, easiest and fastest ways to increase your credit score.
Additionally, you and the primary cardholder should practice smart credit habits; Avoid going into debt or making late payments to avoid a negative item on your report.
6. Reduce your credit utilization rate by requesting a credit increase
To show lenders that you are not credit dependent, make sure your credit utilization rate is 30% or less. Credit utilization is basically how much credit you spend compared to your available credit.
Therefore, the easiest way to reduce it is to ask your credit card provider to increase your credit limit.
Tip: To improve your credit score, maintain the same spending habits by not using the credit boost (that is, keep the same average balance on your card despite an increased limit.)
7. Take out a builder loan
Institutions such as community banks and credit unions provide low-interest loans to people with little or no credit in order to deliberately improve their credit score.
The loan is kept in a savings account until it is repaid. Plus, to help you improve your score, they report all payments to the credit reporting agencies.
Disadvantage: You can only access the funds after the loan is repaid in full. As such, a credit loan may not be ideal if you need money urgently.
8. Review and improve your credit behavior
A good credit score not only determines your credit approval but also guides your cost of living and investment opportunities. It also shows your responsibility for the money to the lender.
Additionally, your credit may even affect your ability to rent an apartment or find a job. Therefore, you need to make sure you manage your credit usage well and pay your bills and credit card payments on time.
In conclusion, to improve your credit score you can do it yourself without resorting to the services of an expert by adopting good financial habits. That said, it’s never a bad idea to get the advice of a financial advisor to chart a path to excellent credit.