Americans are currently using around 23% of their available credit limit – which is indicative of the extent to which credit is a part of daily consumer life. Despite this fact, the average credit score stands at around 703 (based on the FICO Score model). On this scale, a score of 750 is considered very good, while one of 800 or more is excellent. Considering the fact that a score of 800 will enable you to obtain a better mortgage rate than average, ensuring your credit is well managed is key. Read on to discover a few handy tips that will enable you to improve your score.
1. Pay Your Cards On Time
In order to build a good credit score, it is important to understand how FICO and other models such as the VantageScore model, make their calculations. Essentially, your payment history makes up 35% of your score, the extent to which you use credit accounts for 30%, the length of your credit history makes up 15%, your mix of credit is 10%, and your new credit is 10%. Therefore, it makes sense to make a particularly big effort in the realms of timely payments and the way you utilize your credit.
2. Analyze Your Spending Habits
Paying all your various cards on time is much easier when you only spend what your budget permits, and making your budget involves tracking your current overall spending. Start out by downloading an app such as Mint or PocketGuard to get a good picture of your spending habits. Analyze the areas you can cut down on and those in which you can afford to be a little more generous.
3. Pay Credit In A Timely Fashion
When you are over 60 days late on credit payments, your issuers can potentially increase your interest rate, with the penalty rate sometimes reaching 30%. You may also be charged late fees, even if you pay just a few minutes late. By the same token, paying your credit card debt early can lower your interest payments and increase your credit score. Therefore, having a strict schedule for payment is key. If you have several credit cards, consider setting the same date for payment for all of them so as to reduce confusion and error.
4. Lower Your Credit Utilization
Try to ensure you keep your credit utilization at a good rate, bearing in mind how important credit use is to your final score. Your balance (how much credit you actually use) is reported to credit agencies if you pay part of your balance (or indeed the entire balance) before your statement closes. There is no set percentage of how much credit you should be using, but, as reported by Value Penguin, credit scores begin to decrease when people utilize more than 30% or 40% of their credit limit. Therefore, you should ideally aim to spend less than this amount.
5. Reduce Debt
If what is holding you back from a better credit score is being overwhelmed by debt, you may have been advised to get a credit card consolidation loan. This can be useful if you have various accounts to settle at once, since putting them into one monthly bill can make payment easier to work out and therefore, more timely. This option is interesting if you can find a consolidated loan with a lower interest rate than the combined rates of the individual loans you owe. There are various ways to consolidate debt – including taking out a personal loan, going for a home equity loan, and transferring amounts to a balance transfer card. Regardless of which option you are interested in, receiving advice from a financial planner will help ensure that consolidation is actually a wise decision from a long-term perspective.
6. Rank Your Respective Debts
If you have various sources of bad debt, another option is simply to rank your debt, paying off those with higher interests rates first. For instance, if you have a total credit card debt of $20,000 with a 24% APR and a personal loan of $6,000 with a 9% APR, it is evident that you should focus on paying off your credit card debt first. This is the case even if the personal loan is ‘easier’ to pay off fully. Always make long-term calculations to see how you can settle the worst debt before handling other debts. Don’t be tempted to simply spread payments equally; bad debt needs a highly strategic approach based on pure calculation.
Managing your credit effectively is a multifaceted goal that begins with analyzing your spending and creating a strategy for repayment. In order to avoid late fees and penalties, set a strict repayment schedule, ideally choosing one day every month to pay all cards. To limit the effect of bad debt, consolidation and debt ranking are two options. Choose the one that will help you improve your credit score quickly by settling high-interest loans before those carrying a lower interest rate.