Around 80% of American adults live paycheck to paycheck. This means that the average American doesn’t have an extra $500 in their bank account to cover an unexpected emergency.
So what happens when an emergency does strike? Many times, people turn to loans to help get them through financial troubles. But to do that, you need to have a decent credit score.
Not sure if your credit score would suffice in an emergency? Keep reading to discover how to make your credit better.
What Is a Credit Score?
If you’re interested in getting better credit, you first need to understand the basics of a credit score. This three-digit score determines a person’s credit-worthiness.
A credit score is what a lender will use to help determine if you’re approved for their loan or not. Everything from a mortgage to a vehicle loan requires a good credit score. Many times, apartment complexes or workplaces will even check your credit score to see if you’re financially responsible.
There are three main credit bureaus who gather information and provide scores, Experian, Equifax, and Transunion. They collect data based on your past financial transactions that involve credit. Because the credit bureaus may have outdated information or calculate a factor differently, your score may vary slightly from bureau to bureau.
Good Credit vs. Bad Credit Scores
A credit score ranges anywhere from 300 to 850. Since the scoring mechanisms don’t give grades like A+ or D, it can be hard to figure out if you have a good score or not.
This is the traditional ranking for credit scores:
- 850 – 800 is excellent
- 799 – 740 is very good
- 739 – 670 is good
- 669 – 580 is fair
- 579 – 300 is poor
If you haven’t had a source of credit in the past, you’ll have an indeterminate credit score. This may be even worse than a bad credit score as lenders have no idea how you’ll handle a loan.
You don’t need an excellent score to qualify for a loan. In fact, the average credit score is 703, which falls in the “good” range.
Having a higher score means you’ll receive easier loan approvals along with lower interest rates. Having a fair or poor score doesn’t necessarily mean you’ll get denied. Just be prepared for less favorable loan terms if you are approved.
What Factors Impact Your Credit?
Now that you know what a credit score is and the ideal credit score, you need to focus on improving yours. Not sure how to get a better credit score? You need to concentrate on the factors that make up your score.
A credit score is based on these five things:
- 35% — Your payment history
- 30% — Total amounts owed
- 15% — Length of your credit history
- 10% — Your mix of credit
- 10% — New credit
To make the most impact on your score in the shortest amount of time, focus on the factors with the highest percentage first, such as payment history and total amounts owed.
Here is what the credit bureaus are looking for when it comes to each of the score factors.
One of the best tips for better credit is to pay your bills on time consistently.
When a lender is considering whether they should give you a loan or not, they want reassurance that you’ll repay the loan. Because of this, your payment history makes up the most significant chunk of your credit score.
This is something that you need to be consistent about over an extended length of time. A late payment can stay on your credit report for seven years. As time passes, the late payment impacts your credit score less and less, but it still brings down your score until it falls off.
Your payment history also includes any delinquent accounts. So if you’ve failed to repay a student loan or medical bill for several months or years, your credit score will suffer.
The amounts owed on your credit report all combine to produce a credit utilization ratio. This number is determined by adding up your current credit owed divided by your total credit available.
For example, your credit may consist of one credit card. On that credit card, you owe $5,000 but have a limit of $15,000. This means you have a credit utilization ratio of 33%.
A good credit utilization ratio is anything under 30%. For an excellent credit score, keep this ratio under 10%.
To achieve the ideal credit utilization ratio, you’ll want to keep the balance on your credit cards as low as possible without completely closing them. You can also speak to your credit card company about increasing your balance, which will also help lower your overall ratio.
Length of Credit History
A lender wants to see that you’ve had a long history of repaying back any amounts owed. Because of this, the length of your credit history has a pretty significant impact on your credit score.
This is why many young adults are encouraged to get a credit card when they get their first job or go off to college. If you start your credit history early and keep up with your payments, your credit score will reflect this.
But, you can’t go to the past and sign up for a credit card. This means you have to work with the credit you already have.
The best way to keep your credit history length in good standing is to avoid closing accounts. Just because you paid off that credit card, that doesn’t mean you should close it. Instead, use it for a small purchase every few months to keep the account active.
A health credit mix will boost your credit into good standing.
What exactly do the credit bureaus mean when they refer to your credit mix? It just means that you have a variety of credit types on your account. This could include a mortgage, vehicle loan, credit card, medical bills, and many other things.
But this doesn’t mean you should go out open a bunch of new accounts in the hope that your score will rise. Every time you open a new account, this counts as an inquiry on your credit and can temporarily lower your score.
The next time you need cash to cover an emergency, look at your current accounts, and consider an alternative option. If you traditionally put emergency expenses on a credit card, consider a personal loan this time.
New credit on your account affects your score in multiple ways, both good and bad.
When you open a new account, this places an inquiry on your account, which lowers your score temporarily. In addition, a new account will lower the average age of your current credit.
On the other hand, a new credit card with a large limit could help your credit utilization ratio as well as your mix of credit.
Because of all this, you’ll want to be careful and weight your options anytime you take on new debt.
Alternative Ways to Improve Your Credit
All of the above tips for increasing your credit score take time and involve making the right money moves going forward. But there are ways to improve your credit quickly if you think that your current credit report contains inaccurate information.
Start by looking over every aspect of your credit report. Compare the accounts listed with your own records.
If a lender is reporting a late payment that you know you made on time, give them a call to try to fix the issue. If there’s an account on your record that you don’t recognize, call the lender to find out more about it. You might even discover that someone has fraudulently used your identity for their own financial gain.
There are many credit repair companies that will take the time to go through your report and argue any discrepancies on your behalf.
Don’t Have Time to Fix Your Credit?
If you don’t have time to work on a credit score increase, there are alternative options to gain funding. Three main options include a secured loan, finding a bad credit loan, or enlisting the help of a co-signer.
Secured loans are loans that are tied to an asset your already own, like a vehicle. When you sign up for this kind of loan, you are using this item as collateral to offset the risk the lender is taking. If you do fail to repay the loan, you risk losing the asset that you used to secure the loan.
Bad credit loans are smaller loans with shorter repayment periods. Because these loans don’t require a good credit score or collateral, they generally come with higher interest rates. In exchange, they provide the money quickly and have very few approval requirements.
Having a co-signer is a good fallback option if you need loan approval. Find a family member or friend who has excellent credit that trusts you. As a co-signer, they are partially responsible for the loan if you fail to make the agreed-upon payments.
Now You Know How to Make Your Credit Better
After reading this article, you now have a better understanding of what a credit score is and how to make your credit better.
Start by concentrating on the five main factors that determine your credit score. Focus a lot of attention on the total amounts owed and your payment history, as these have the most impact. If this becomes too overwhelming, you can hire a credit repair company to do the work for you.
No matter what route you take, keep in mind that repairing a credit score takes a lot of time and patience.
Looking for more ways to create a bright financial future for yourself and your family? Bookmark our Money section for all the best financial advice.