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A recent Money and Synchrony Bank study revealed 90% of people who consider themselves “savers” feel a sense of responsibility. And having a good credit score is an important part of any responsible financial decision you have to make. The better your score, the better interest rates you qualify for when you apply for any type of loan or credit card. Even renting an apartment can depend on your ability to prove you’re financially responsible.
Unfortunately, not everyone has a perfect score, especially now with the economic impact of COVID-19. However, there are steps you can take to get closer to that ideal score. You just have to be a little patient; so the journey to improving your credit score is a marathon, not a sprint — but a good credit score is essential to
The CARES Act and Your Credit Score
The impact of the Coronavirus pandemic on the U.S. economy has been dramatic. Entire industries have been closed down in an effort to control the spread of the virus, sending the unemployment rate to a high of 14.7% by the end of April. While the unemployment rate has come down in the last two months, there are still a very high number of people without a steady income and who are having to make decisions about which bills to pay and which to let slide.
Passed on March 23, 2020, the Coronavirus Aid, Relief, and Economic Security Act temporarily amends the Fair Credit Reporting Act and provides some protection for consumer’s credit scores.
If you are struggling to make payments you can reach out to your lender or loan servicer for what the CARES Act calls an “accommodation,” which can take the form of suspended or reduced payments. If you were current on your payments and have reached an accommodation, your lender can’t report missed or reduced payments as being delinquent. The lender will continue to report your account as being current.
If you were already delinquent on an account however, that status is not removed from your credit report.
If you have a federally backed mortgage loan (FHA, VA, USDA, Fannie Mae or Freddie Mac) and you can’t make your monthly payments, you can request forbearance. This means that your lender agrees to allow you to make reduced payments or to pause your payments altogether. You will have to make up the amount in forbearance at some point in the future, however.
If you are in forbearance your mortgage lender cannot report your account as delinquent if you skip payments or pay a reduced amount. The lender can report the account is in forbearance, however, and although it won’t affect your credit score, it can have an effect if you try to take out a new loan.
If you have federally backed student loans, payments are automatically suspended through September 30, 2020. Interest will not accrue during this time, and your lender must report your account as being current to all three credit reporting bureaus.
If you have a private student loan, you must contact your lender or loan servicer to seek an accommodation under the CARES Act.
Check Your Credit Report
The first step to improving your credit score is to check your credit report. You can get a free copy of your report at annualcreditreport.com. Under normal circumstances you would be able to get one free report from each of the three major credit reporting bureaus (Experian, TransUnion, and Equifax) per year. However, in response to COVID-19, from now until April 2021 you can access a free weekly report from any of the bureaus.
Once you have your report you can check it for errors in reporting that can be dragging your score down. If you do find mistakes, such as payments that haven’t been recorded, you can have them removed by disputing the information directly with the credit bureau. They are obligated to investigate any dispute and resolve it within a reasonable amount of time. Keep in mind, however, that only incorrect information can be removed from your report.
According to Jeff Richardson, spokesperson for VantageScore, each credit report will have the information you need to improve your score. “There are four or five bulleted statements about your credit profile that can kind of help you make a road map of what to do if you’re really in a position where you need to improve your score,” he says.
You may also find a numerical or text code in your report, but no additional information as to what it represents. These are factor codes, and represent items that may be dragging your score down. VantageScore has a free website, ReasonCode.org where you can enter the code from any credit report and get an explanation of what it stands for and advice on how to resolve the issue.
If you’re unsure if there are mistakes on your report or have trouble getting issues resolved on your own, you can look for expert help. There are credit repair companies that not only know how to identify and correct erroneous information, but can also help mitigate the impact of legitimate negative items on your report.
Check Your Credit Score
Now that you know what’s in your credit report, it’s time to find out what your credit score is. There are a number of different online sites where you can get your credit score for free, such as Credit Karma and LendingTree. These sites will also offer a number of tools that will help you understand which actions you can take and how they will affect your score.
There are two major score providers – Fair Isaac Corporation (FICO) and VantageScore, with each of these companies using different models to calculate your credit score. But know that credit unions, banks and other financial institutions may have their own methods of calculating your score as well, so expect to see some variation if you are doing multiple credit checks.
Your credit score is a representation of how creditworthy you are – whether you are a high or low risk borrower. You should know what represents a good credit score. Both FICO and VantageScore will have the same ranges – from 300 to 850. A score of 700 is considered Good by both scoring companies. The better your credit score, the better interest rates and terms you’ll be offered by lenders.
Once you have an idea of how much room you have to grow, use these tips to begin building better credit.
7 Steps to Raise Your Credit Score
1. Pay Your Bills On Time
According to Experian, payment history is the most influential factor for both FICO and VantageScore.
Your credit score is essentially a reflection of your ability to pay back debts effectively. From a lender’s perspective, an established history of timely payments is a good indicator you’ll handle future debts responsibly, too.
“You want to avoid things like late payments, defaults, repossessions, foreclosures and third party collections,” says John Ulzheimer, credit expert, formerly of FICO and Equifax. “And filing bankruptcy is a horrible idea. Anything that would indicate non-performance of a liability is going to harm your credit score.”
2. Keep tabs on your credit utilization rate
Weigh your balances relative to your credit limit to ensure you’re not using too much available credit, a practice which can indicate risk.
“The higher that ratio, the fewer points you’re going to earn in that category and your scores are absolutely going to suffer,” Ulzheimer says.
Credit utilization is one of the most influential categories that affects your score. Your ideal rate may vary depending on the scoring system used.
“In FICO’s systems, less than 10 percent is the optimal target,” Ulzheimer says. “In fact, people who have the highest average FICO scores have a utilization of 7 percent.” VantageScore, on the other hand, looks for a target utilization of 30 percent or below.
Ulzheimer recommends trying to maintain a utilization rate of 10%, as this will help you maintain a higher score regardless of the scoring platform used.
The date your revolving credit issuer reports your information to the credit bureaus may also impact your utilization rate.
Ulzheimer points out that FICO’s scoring systems don’t differentiate between those who pay in full each month and those who carry a balance; the utilization that appears when your issuer reports your account information is the rate scored. VantageScore, though, does consider whether you pay in full or carry your balance month to month.
If you struggle with high balances and mounting interest payments on your cards, consider consolidating with a zero percent introductory rate balance transfer credit card.
3. Leave old debts on your report
Once you finally get rid of student debt or pay off your auto loan, you may be impatient to get any trace of it wiped from your report.
But as long as your payments were timely and complete, those debt records may actually help your credit score. The same is true for your credit card accounts.
“An account that’s paid in full is a good thing; however, closing an account isn’t something that consumers should automatically do in the hopes that it will positively impact their credit score,” says Nancy Bistritz-Balkan, vice president of communications and consumer education at Equifax. “Having an account with a long history and solid track record of paying bills on time, every time, are the types of responsible habits lenders and creditors look for.”
Closing a credit card account can actually lower your credit score, as you will now have a lower maximum credit limit. If you’re still carrying balances on other cards or loans, your utilization ratio will go up. You’re better off keeping the card with a $0 balance.
Any bad debts that can impact your score negatively are automatically removed over time. According to Ulzheimer, bankruptcies can stay on your credit report no longer than 10 years, while late payments and delinquencies such as collections, repossessions, foreclosures and settlements stay on your report for seven years.
4. Take advantage of score-boosting programs
The number and average age of your accounts are both important factors in helping lenders determine how well you handle debt, which can leave those with a limited credit history at a disadvantage.
Experian Boost and UltraFICO are two programs that allow consumers to boost a thin credit profile with other financial information.
After opting into Experian Boost, you can connect your online banking data and allow the credit bureau to add telecommunications and utility payment histories to your report. UltraFICO allows you to give permission for your banking data, like checking and savings accounts, to be considered alongside your report when calculating your score.
5. Only Apply For Credit When You Need It
Every time you apply for a new line of credit, a hard inquiry is pulled on your report. This type of inquiry lowers your score temporarily. Applying for credit, be it a credit card or a loan, just to see if you get approved or because you received a pre-qualified offer of credit is not a good idea.
If it’s a single hard credit pull, the drop will be slight. However, a string of hard inquiries over an extended period of time could indicate to lenders that you are taking on too much debt and may run into trouble. The effects of a hard credit pull on your score, according to a representative of TransUnion, can last from 6 to 12 months.
If you do need to apply for new credit, research your likelihood of approval to ensure you’re a good candidate before applying. If possible, get a pre-approval or pre-qualification, as in many instances these result in a soft rather than hard credit pull. Soft pulls don’t affect your credit score You don’t want to risk lowering your score for a denied application.
You should also refrain from applying for several credit cards within a short time frame, or before taking out a large loan like a mortgage.
When you shop for a mortgage, auto, or personal loan, you can keep hard inquiries to a minimum by making rate comparisons within a short time period. Applications for the same type of loan within a designated time frame will only appear as a single hard inquiry. According to FICO, this span can vary from 14 to 45 days.
6. Be patient
You won’t raise your credit score overnight, which is why one of the best ways to achieve an excellent score is to develop good long-term credit habits.
According to Ulzheimer, two influential factors that go into your score are the average age of information and the oldest account on your report.
“You’re really going to need to have credit for a couple of decades before you max out those categories,” Ulzheimer says. “It takes a really, really long time to improve a bad score and it takes a really short amount of time to trash a good score.”
Establish good habits, like paying your balances on time, keeping a low utilization rate and applying for credit only when you need it, and you should see those practices reflected in your score over time.
7. Monitor your credit
When you view your own credit, a soft inquiry is pulled, which doesn’t affect your credit the way hard inquiries do.
“The information in the credit reports will not only enable you to see all of your financial accounts in one place, but reviewing them may also help you spot signs of identity theft,” Bisritz-Balkan says.
Monitoring your score’s fluctuations every few months can help you understand how well you’re managing your credit and whether you should make any changes. However, you shouldn’t base any financial decision you make solely on your credit score.
“I wouldn’t recommend hanging every decision on a credit score, but hanging every decision on what matters,” says Richardson, adding, “Focusing on your financial health and your family’s health is priority number one.”