Wondering how to improve credit score? Well, whether you are recovering from a financial error or starting from scratch, you may be wondering how long it takes to build excellent credit. Although you can’t get a decent credit score overnight, you can create one from scratch in three to six months. Keep reading to learn about the simplest ways to improve credit score. But first, let’s learn about credit scores in depth.
What is Credit Score?
A credit score or rating is a number between 300 and 850 that represents a consumer’s creditworthiness. The higher the score, the better the homeowner is perceived by potential lenders. Credit rating is based on credit history—the number of open accounts, total debt, mortgage history, and other factors. Therefore, the mortgagers use these credit scores to evaluate whether borrowers will repay the loan on time.
Why you should maintain a good credit score?
Establishing a good credit history is critical to your long-term financial health when preparing to borrow for large purchases (such as vehicles and houses).
How to Build Credit Score from Scratch?
The good news is that if you start from scratch, it will not take long to establish your credit history. According to Experian reports, one of the largest credit bureaus, three to six months of regular credit activities are required before your documents become thick enough to calculate your creditworthiness.
The size of your file depends on the number of points you earn during this period and how often you use your accounts. Here are some of the quickest methods to establish good credit.
1) Get your credit card
If you are not eligible for a “normal” unsecured credit card, you can apply for a secured credit card. Since a secure card requires deposits and doesn’t implement restrictions, it is easier to access than a non-secure card.
Finally, credit cards can help you get credit faster because your information is shared with credit bureaus and other financing companies.
Many credit card issuers provide information about your credit card balance and payment every month. Therefore, if you buy once or twice a month and then cancel, it will be reflected in your credit history.
Both FICO and Vantage Score significantly impact your payment history and the credit limit you use. Therefore, every time you make on-time card repayments and keep your outstanding balance below 30% of the available amount, you will get positive results on your credit report.
2) Pay off the installment loan
You can also expand your credit profile by making on-time repayments and acquiring an installment loan. Do you know that your student loan is an installment loan? Or, you can apply for a personal loan and return it in installments.
Typically, credit diversity has a significant positive effect on your score. Making small personal loans based on your credit cards is an effective way to build good credit from scratch.
3) Become an authorized user of someone else’s account
Another way to fill out your thin credit profile and built credit faster is to add yourself to another account as an authorized user. You can do this if you are closely related to the owner’s account. Therefore, this strategy is most suitable for parents or spouses.
If your parents want to add you as an authorized user, you will benefit from their excellent credit. You will not experience the same effects as your credit card. Still, it will help even if you have never used an issued credit card.
How to Improve Credit Score?
There are some steps to improve your credit score. Typically, people must begin with the two most significant factors in determining a good credit rating.
- Your payment history: Paying bills on time is necessary for an exceptional credit score.
- Your credit utilization rate: It’s essential to keep your credit card balance as low as possible. Also, compare your card balance to your credit limit—reflected in your credit utilization rate or BTL (balance-to-limit) ratio.
To keep your balance or credit in good shape, here are four essential habits to help you build a good credit score every day:
- Paying Bills on Time for a good credit score
The most important thing to maintaining an excellent credit history is paying your bills on time. Payment history represents the largest share of your FICO Score and is considered an essential part of your VantageScore. To ensure that you don’t miss regular payment deadlines, establish automated monthly settlements for at least the minimum amount owed.
Also, it would help if you consider reviewing the credit score and repaying bills within a month instead of waiting for the due date. Remember that payments delayed for more than 30 days can remain on your credit history for seven years.
2. Manage Your Credit Utilization at Low Values
The overall credit utilization measures your account balances compared to your credit limit. Here is how it works:
- Add lines of credit across all your bank accounts to find affordable credit.
- Add up any debit card balances.
- Divide the total balance by the available loan and convert it to a percentage to get the loan utilization ratio.
When it comes to credit score ratings, the lower your CU ratio, the better. Typically, keeping your utilization rate below 30% will prevent harm to your credit score; people with the highest credit ratings tend to have low single-digit credit utilization rates.
3. Check your credit score regularly
It’s always good to determine where your credit rating stands and how it changes—it helps you understand how your actions impact the credit reports. Beyond this, scrutinizing your credit history can help you find any troubles that may be brewing and turn around the program if you’re getting off track. If you are in the process of improving your credit history, increasing your scores is excellent positive feedback.
Furthermore, you should also check your credit report periodically. This not only helps to detect any negative or inaccurate information (that may arise) but also ensures there are no new accounts you have not applied for—this could be a sign of identity theft.
4. Apply for New Credit Only When Required
Having multiple accounts and credit combinations is good for your credit score. This signifies to the lending companies that you know how to manage various types of loans.
However, too many loan applications can reduce your creditworthiness. Every time you apply for a home mortgage, the lender will ask for your credit report, which is known as a hard inquiry. While a thorough investigation might result in a small and momentary drop in your credit rating, a few recent applications can have a significant impact on your credit. More so, a constant stream of complex queries might trigger lending institutions to consider you a serious credit risk
5. Paying overdue bills
It will be helpful to provide the current bank statement if you are behind in paying your bills. Although late payments can remain on your credit report for up to 7 years, having a good reputation on all your accounts can benefit your rating. More so, it prevents delayed payments from being added to your credit history and additional late fees.
Communicating with a credit counselor and obtaining a debt management plan (DMP) may be a good choice for those struggling with credit card debt. The advisors can negotiate lower interest rates and fees and drive card issuers to update borrowers’ credit accounts.
Although it takes time to build a good credit history from scratch, it is not impossible. Your credit rating is a number that can either save you or cost you a lot of cash in your life. Therefore, improve credit score – exceptional credit scores can lead to lower interest rates, which means you’ll spend less for any line of credit you receive.