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Three little numbers.
Those three little numbers can have a significant impact on your household finances in the early stages of your financial life cycle (when you become debt free and financially independent the impact these numbers have is lessened greatly).
Interest rates, insurance policy premiums, even the ability to rent can all be adversely impacted by a bad credit score.
It is therefore vital to make attempts at improving those three numbers whenever you can.
Good Nelly, from My Way Of Viewing, has several prior contributions as a guest poster on this website.
Her latest submission addresses options to help keep the creditors off your back and help optimize your credit score.
[Disclaimer: We have no financial relationship.]
As per the New York Federal Reserve Household Debt Report, Q2 2018, the total number of credit accounts in our country is 469,640,000!
Can you imagine?
But do you know the irony?
A survey conducted by the Consumer Federation of America revealed that a staggering number of people in our country know very little about credit scores and almost a quarter of them don’t know how to upgrade or even maintain their scores!
To make matters worse, there is a prevalent myth that in order to improve your credit score it’s necessary to carry forward your outstanding balance!
The truth is quite contrary to this line of thinking as the best possible way to improve your credit score is to pay off your outstanding balance amount in full every month.
Why are credit scores so important?
In our country, 90% of the creditors assess your credit score from the major credit bureaus before approving your loan requests.
The three major credit reporting bureaus from which usually the creditors pull out reports are Equifax, TransUnion, and Experian.
Generally, your credit score ranges from 300 to 850, but typically a score above 650 is considered as a good one.
But before we start, it is important to know the basics of what your credit score is comprised of:
- Payment history – 35%
- Credit usage – 30%
- Length of credit history – 15%
- Credit mix – 10%
- New credit inquiries – 10%
To improve your credit score, you can opt for various strategies like:
Credit card consolidation.
Credit card consolidation is one of the effective ways to get out of credit card debt.
This method helps when you feel trapped with your multiple credit card bills and high-interest rates, and don’t know what to do.
Using this technique allows you to consolidate your various credit card bills into a single monthly payment and at a lower interest rate that can be negotiated with your creditors.
But, what if your creditor(s) doesn’t want to negotiate or you are exhausted with the negotiation process?
Credit card consolidation program.
In such a situation, you can take help from a genuine credit card consolidation company.
But remember, their services come along with a certain professional charge.
Opting for credit card consolidation might affect your credit score temporarily.
However, do you know that credit card consolidation actually helps to improve your credit score?
After you have paid your outstanding balance amount through single monthly payments, your credit report shows “paid in full”.
As a result, your payment history, which accounts for 35% of your credit score gets better!
It’s a new loan which you can use to pay off all your existing credit card bills.
Applying for a new loan however hurts your credit score.
So check out the interest rate, origination fees, early payoff fees along with minimum credit score required for that loan.
Choosing an apt consolidation loan can save you more while paying off your consolidated credit card bills.
Generally, the interest rate of the consolidation loan depends on your creditworthiness.
Opting for this loan helps you to save money on your overall interest payments.
Make sure you take out a loan with a much lower rate of interest than that of your credit cards.
Balance transfer method.
You can pay off your high-interest credit card bills by transferring it to a new credit card.
In this method, the new credit card ideally comes with a 0% APR (Annual Percentage Rate) as most of the balance transfer cards offer this for an introductory period.
However bear in mind that many balance transfer cards will charge about 3% to 5% of the amount transferred as a balance transfer fee.
It is therefore important to be cognizant of the transfer fee to see if you come out ahead financially with this move.
Currently, there are many balance transfer cards offering a 0% APR for about 15 months to 21 months.
For example, Citi Simplicity Card, has a 0% APR for 21 months.
The savings from the reduced interest can then be used to attack the principal balance.
As the credit usage accounts for 30% of your credit score, it’s always best to pay off your outstanding principal as much as possible.
Paying off your credit card bills on time also improves your credit utilization ratio which is defined as the amount of credit you are using now, divided by the total available credit to you.
How much time will it take to improve your credit score?
You might think that soon after paying off your credit card bills in full, your credit score will improve drastically.
But it’s not like that!
It usually takes a few months to see improvement in your credit score.
You might notice an increase of about 20 points after three months of paying off your debts in full.
Why not debt settlement?
You might have heard about credit card settlement for paying off your multiple credit card bills.
But, is this a fruitful method to improve your credit score?
In this method, you have to negotiate with your creditors to actually reduce the outstanding balance.
After negotiation, you can pay a lump sum amount and settle the debt.
Opting for credit card settlement will create an adverse effect on your credit score, as your debts get marked as “paid as settled” which is far less desirable than the “paid in full” you would like reported by the credit bureau agencies.
In addition this stain on your credit report remains for almost 7 years!
Additional ways to improve your credit score.
Credit utilization ratio.
● Maintain your credit utilization ratio so that you don’t use much of your available credit.
Usually, a good credit utilization ratio is less than 30%.
For example, on a credit card with a $10,000 limit, you should keep your balance below $3000.
● “The higher that ratio, the fewer points you’re going to earn in that category and your scores are absolutely going to suffer,” John Ulzheimer, credit expert, formerly of FICO and Equifax, says.
● Using too much credit can indicate risk to your credit score.
● According to Ulzheimer, two influential factors that go into your score are the average age of information and the oldest account on your report.
● Your credit report will not improve overnight.
Rather it will take a certain time to reflect your creditworthiness in your credit report.
So be patient during this time of transition.
Inquiry for new credit cards.
● It’s not advisable to look for other credit cards when you are already on the verge of credit repair.
Because a “hard-inquiry” is pulled on your report as soon as you look for other credit lines and the effect lasts for 6 to 12 months.
● Each time you apply for a new credit card, your score can drop by about 5 points.
As this factor accounts for 10% of your credit score, it can damage your credit score to some extent.
Dispute your credit report error(s).
If you come across any error(s) in your credit report, you should definitely contact the credit bureau.
Error(s) can adversely affect your credit score and can be in the range of lowering it by 60 to 110 points.
Inform the credit bureau and the concerned organization as soon as possible to avoid being penalized for something you are not responsible for.
As the above graph shows, there appears to be a growing awareness regarding credit scores as the average FICO scores have hit a new high.
Hopefully by following the above advice and choosing the options that best suit your need you can indeed salvage a bad credit score and turn what was once a negative into a positive.
If you enjoyed this content by Good Nelly, feel free to visit her blog for her other articles:
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The main components of your credit score is payment history, credit utilization, and length of credit history. Therefore: – Payment history- ALWAYS pay your credit card ON TIME and IN FUll. NEVER carry a balance and Absolutely NEVER forget a payment. So the key is never to spend more than what you have (don’t spend beyond your means), and automate your payments in full so that you never ever forget. – Credit utilization- Never use more credit that what you are issued. Ideally, stay far less than 50% of utilization. If creditors issue you $10,000 of credit, NEVER borrow more… Read more »
Great tips DMF. I am not sure if this makes a different or not but I go so far as clear my credit balance with every paycheck (bimonthly). So whenever the credit score companies pull their data it may be lot less than if I wait till end of the month
It does make a difference. Different credit bureaus pull credit scores at different times of the month. Clearing your credit balance often does improve your credit score because it will decrease your credit utilization. I usually clear my balances every week and have automatic payments just in case (since I have so many credit cards I use automatic pay as a fail-safe in case I forget).