How is Your Credit Score Determined and How to Fix It

So, you’re learning how important your credit score is. You know that your credit will be analyzed before you buy a house, a vehicle, a boat, or other large purchases. If you’ve thought that you don’t need good credit because you plan to be debt free. Being debt free is the American dream, but it can be very hard. A trip to the ER could ruin that. If you have a vehicle that is paid for, that’s great! What happens if it breaks down and you don’t have the money to repair it? This is when credit comes in. Having good credit isn’t just about buying fun things, its a backup plan when you need help. Let’s take a look at how to build credit or to improve the credit you have.

How is your credit score figured?

To understand how to restore poor credit or to begin building, you must first know how it is figured. There are five components to your score. They are also weighted differently.

35% is based on your payment history. This is pretty straightforward. Do you pay your bills? Are they paid on time? Do you miss payments on a regular bases. Lenders obviously want to know if and when they will be repaid.

30% is based on the amounts owe. Do you have a lot of debt? This shows the amount of debt you have and lets the lender see if you can afford to take on another payment. The less debt you have, the better your score will be.

The age of credit is important because it shows the trends of your behavior. This gives a good indication of the level of risk you are.

10% of your score is based on the types of credit that you have. You want your score to be diversified.

New credit makes up the final 10% of your score. This shows how many new accounts you’ve opened.

How to Build Credit

If you don’t have any credit, it can be hard to even start building your credit. Most people starting out will open a secured credit card. Many banks offer this. You will typically start small. For a $200 credit card, you will deposit $200 into an account. That’s where the secured part comes from. Then treat it like a normal credit card. Remember, it’s backed by your own money.

This is not the time to open a bunch of new accounts. This will make you look risky. Only open a new account if you need it.

If you have parents or someone that can add you as an authorized user on thier account, this is a good way to build credit.

Sometimes, you may need a cosigner to get your credit started.

How to boost your score

First, get your credit report and check for errors. Mistakes do happen. This is the time to review it and ask for corrections to be made. Even small errors can add up to many points.

Get a secured loan or credit card. This is a good way for people with poor credit because credit isn’t a huge factor. Your money will back your account. There are also loans you can get without good credit  if you don’t have extra money to put into a secure loan.

Pay off debt. If you have a lot of debt, pay it off. Start with the smallest debt and pay it off. It may be tempting to pay the largest off first, but this way you can close more accounts quickly.

No new inquiries. New inquiries deduct points from your score and also make you look like you are risky.

Keep credit card balances below 20%. It is tempting to use all of the credit you are given, but it isn’t good for your score. Show that you are responsible by only using no more than 20%

Ask your credit card company for higher credit. If you already have a credit card, ask them to increase your limit. You don’t want to use that, but it will help with your ratios.

Pay bills on time. Besides paying them back. It needs to be done on time. Missed or late payments are bad for credit. Even Even unpaid or late student loans can kill your credit.

Now that you know how credit is factor, make smart choices about types of credit to get and how much to use. Remember to use it wisely, because spending too much can be bad for your score.

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