A low credit score will hurt you when trying to obtain any type of credit. Although you won’t be denied new credit, you may not get the best interest rates. You will also not benefit from large credits or longer repayment periods to pay off the debt.
Fair or even bad credit scores can be improved. It will take time, but any effort you make to improve your credit score will be worth it if you ever consider borrowing money or getting a low interest credit card.
The fastest way to boost your credit score
The larger companies that determine your credit score (Equifax, Experian, and TransUnion) use similar methods to calculate the score. The two main factors that affect your credit score are paying at least the minimum amount of your bills on time (35% of your credit score) and the amount of debt you have relative to your available credit (30%). This last figure is always expressed as a percentage.
Just paying attention to these two factors will quickly boost your credit score, and if you already have a good credit score, maintaining it will increase it even further.
Standard, secure and paid cards
Let’s look at three types of credit cards that can be used to improve your credit score.
A second type of card is a secure card. This card works the same way as a standard credit card, with one exception. You will need to pay a deposit to use this card. The amount of the security deposit will correspond to the credit limit of the card: a higher security deposit will equate to a high credit limit. Security deposits can range from $49 to $5,000. The card issuer keeps the deposit until you close the account. In the event of non-payment, the deposit will be used to pay the balance.
Many secured cards are chargeable and you will need to pay the minimum amount charged each month to boost your credit score. In most cases, you’ll need to use the card for a year or more before the card issuer offers you a standard credit card.
A third type of card is a charge map. Charge cards do not have preset spending limits and generally require cardholders to pay their balance in full each month or incur a fee. For this reason, the balance and credit limit of these cards are not taken into account in your credit score.
Like other credit cards, charge cards can be used to boost your credit score. However, to get a credit card, you must already be fairly well off and have a good to excellent credit score.
Old and new cards and their impact
Getting a new credit card can be beneficial. The new credit available will instantly reduce your debt ratio.
Keeping old credit cards, even ones you haven’t used in a while, will also keep your debt ratio lower. Conversely, closing them will increase your debt ratio.
Keeping old credit cards will also help your credit history by showing that you’ve had credit for a while, which is 15% of your credit score. Your credit history, on average across your accounts, makes up 15% of your credit score.
Be careful not to buy too many new credit cards: this could further hurt your credit score by making you seem like a risk to lenders. Also, when you apply for a new credit card, potential lenders will access your credit report – what’s called a “meaningful inquiry” – which will temporarily reduce your credit. Each new credit card also reduces the average age of your credit.
Either way, you should keep an eye on the monthly statements for all your credit cards to make sure no one else is using them.
Look for credit report errors
Before getting a new credit card, review your credit report. If you find any errors, contact the company that put them there and have them corrected. Deleting them from your report will increase your credit score, but it may take a few months for the correction to appear on your credit report.
Once You’ve Got a Credit Card: Building and Improving Your Credit
After getting a credit card or secured card, you’ll want to make a few small purchases with the card. Forbes advises you to put no more than 30% of your available credit on the card. To find this limit, simply multiply your total available credit by 0.30. For example, if your card’s credit limit is $200, multiply by 0.30 and you’ll see that you shouldn’t put more than $60 on the card. You’ll do even better if you don’t put more than 10% of your available credit on the card and pay it off in full each month.
To reiterate, it is very important that you pay the minimum amount due once a month. Failure to do so could hurt your credit score even more. You will still need to make small purchases with the card and pay on time. Credit reporting companies look for your ability to pay regularly on time before increasing your score.
A late payment report can stay on your credit report for over seven years, but its impact on your score will lessen over time.
Reducing debt, whether from credit cards or loans, will help your credit score. Potential lenders are looking for your ability to control credit and reduce debt. Therefore, it’s best not to charge new fees to credit cards unless you can pay them back each month. The exception would be cards that you use to establish your credit score by establishing a payment history.
Negotiate with your credit card company
If you have an existing credit card, Business Insider suggests you contact the credit card company and see if you can increase your credit limit. This will instantly reduce your debt ratio, which will increase your credit score.
Business Insider mentions another great way to get a better credit score. Call your credit card company and ask for a lower interest rate. A lower interest rate could make it easier for you to pay off your balance or make timely payments.
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