How to Improve your Credit Score Fast
Improving one’s credit score is a long process and will require a lot of financial discipline and awareness on the part of the person. Since a credit score shows a history of an individual’s payment and spending patterns for many years, improving it, in case it is in a bad state, will not happen instantly. Although it displays a person’s expenses and payment history, it is also important to note that a credit score focuses on the most recent financial information you have on record.
To improve your credit rating, it is advisable that you fully understand first what a credit score is and how it works when it comes to your eligibility to get a loan, request for a credit card, rent a house, and avail of other services.
Below are some important details to help you with what you need to know about credit score, how it works, what events can increase or decrease it, how can it be improved, and many other things. You can see all the sections that will be covered below, or you can simply read the whole thing.
- What is a Credit Score?
- Difference Between FICO Score and Other Credit Scorese
- What Affects your Credit Score the Most?
- What is Considered a Good Credit Score?
- How to Check Your Credit Score
- Does Checking your Credit Score Lower it?
- What Happens to Your Credit Score When You Cancel a Credit Card?
- Does Debt Consolidation Affect your Credit Score?
- Do Student Loans Affect Credit Score?
- How does Bankruptcy Affect your Credit Score?
- How Many Points does a Repossession Drop your Credit Score?
- Why did My Credit Score Drop?
- Having a Good Credit Score is Important Because…
- What Credit Score is Needed to Buy a House?
- What is a Good Credit Score to Buy a Car?
- Best Ways to Improve your Credit Score
- How Long does it Take to Improve your Credit Score?
- Fastest Way to Build Good Credit
- How to Dispute an Error on your Credit Report
- How to Get My Credit Score Above 700
- How Tax Liens Affect your Credit Score
- Low Credit Score Home Loans
What is a Credit Score?
A credit score suggests an individual’s credit health or worthiness. The rating is expressed in numbers, which are made of 3 digits that are derived by running a mathematical calculation using a person’s expense and payment history. The rating can range between 300 and 850. 850 is considered the highest rating that a person can get.
It is important to maintain a good credit score as the higher the credit score is, the more stable the financial status is. This means that you will most likely qualify and get approved for a loan, get a higher amount, lower interest rates, and the best offers from lending organizations out there.
A credit score has been designed to forecast an individual’s potential to be delinquent based on his or her current financial capacity, source of income and debts. Lending organizations such as a bank or credit card companies use one’s credit score to assess a person’s ability to pay a loan or his debts. It will tell whether a person should be granted a loan or not, how much it will be, how high the credit limit can go, and what the interest rates will be. The credit history is normally obtained from various credit companies and is being evaluated for the protection of the lending company.
Keep in mind, however, that the benefits of getting or evaluating a credit score do not only affect banks. Other companies that an individual will be dealing with, where money is involved, can also use a credit score report to assess a person’s capability to pay and not cause a company some financial losses. These companies include insurance organizations, mobile phone and phone line companies, and the likes.
It may also benefit a property-owner or a landlord who wishes to have his or her place rented out by a person whom he or she does not know personally. In this case, assessing a person’s credit score, apart from confirming his or her identification and police record, will help a landlord ensure that he is getting a lessee that will be able to pay promptly and will not cause any inconvenience to him financially and when it comes to the property’s safety.
An individual’s credit score can be obtained in various models, but the FICO methodology is the most popular one in the market. As a matter of fact, it has been published that 90% of financial organizations in the United States operate using the FICO credit score system in assessing the credit standing of their clients.
Difference Between FICO Score and Other Credit Scorese
In the past, determining the credit rating of a person was a mystery. It was not known what was behind or the basis of the decisions being made by lending organizations in granting their clients with a loan. Indeed, this has changed over the past few years as more people are now aware what a credit score is and how it affects their financial credibility.
With this development, however, we can still say that most of us still do not receive any education, both official or unofficial, on our financial wellness and credibility. Some may get basic training at home about proper financial management, but it is something an individual will absolutely learn as he or she goes through life and encounters real time financial lessons.
When you first got your first pay from your first job, you either opened a bank account, spent those on your dream shoes, went out for a nice dinner, or gave some to your parents. As you stay longer in your company and your salary becomes higher and more stable, you may start considering getting a car or investing in a house of your own.
In all these years, as you go through life as what was mentioned earlier, you have become more aware of how to manage your finances and any problems that come with it. This is also the time when you learn more about credit scoring and how it will affect your credibility as an individual when it comes to your ability to pay your debts. You may also learn the different types or models of credit score.
Under this section, we will specifically tackle and try to understand the difference between a FICO score and a credit score. Below are some important details for your reference.
- Understanding Credit Score
A credit score is a numerical rating a person will get, which measures a person’s credit worthiness. It can be obtained from different credit institutions and can be generated using different models or methodologies. The methodology of getting a person’s credit score involves a review of the individual’s credit history, but highlighting the most recent information. A FICO credit score is one type of a credit score or is one way of getting it.
A credit score is relevant for many people as it becomes part of a person’s financial history. And the said information becomes visible to lending institutions such as banks, insurance companies, and the likes. The awareness they have on your credit standing can either make or break you when it comes to your loan application.
Keep in mind that your credit score is viewed by many as a direct reflection of your credit worthiness. If you have a good credit score, then you are seen by lenders as a credible person who would pay off his financial obligations promptly. This will make lending institutions such as a bank to most likely not hesitate to grant you a loan and give you a bigger one with better interest rates.
- Understanding FICO Score
FICO, formerly known as Fair, Isaac and Company, was created in 1956 with a simple goal in mind – that is to have a systematic and reliable way to assess the credit worthiness of a person. Before the year 1956 and up until the 80s, lending organizations did not have a standard way to assess a person’s financial credibility. Everything was done based on personal assessment, which of course was baseless and unfair to consumers who were hoping to get a loan at that time.
FICO established the first credit rating system by introducing a scoring system ranging from 300 to 850. It was based and generated using a client’s credit or financial history. This system was sold to different lending organizations and it came out as a beneficial methodology since then.
In the 80s, FICO enhanced the process by building a software. This software automated the FICO credit score system and made it easier and more reliable to use. After it was introduced, 3 primary credit reporting organizations such as the Experian, Equifax, and TransUnion started using FICO scoring system in their credit reporting. And because of the reliability it provides, FICO and its credit rating system remain to be one of the most used and known credit rating methodology up to this day.
What Affects your Credit Score the Most?
A credit score reflects the financial readiness of a person to get a loan and pay it promptly after considering other existing factors such as an individual’s existing source of income, payables, interest rates, economic status, and many others. It is used by many organizations to decide whether to grant a person a loan, approve him of a car purchase or loan, or issue him a credit card.
A person’s credit rating will tell companies what the risk is to give you a financial obligation and if you will be able to pay the loan, car, or the credit card timely. It may also be used in getting an insurance policy or trying to rent out a condominium or an area for business. Indeed, a credit score has a lot of impact on one’s personal financial standing.
Because of the uses and relevance of credit ratings, it is important that a person understands what exactly the factors are that affect his or her credit score. There are several pieces of information that go with it. Each factor in the list below is critical and can improve your credit score or bring it down, depending on the situation. Knowing these details will help you manage and understand what to watch out for to maintain a good credit score.
Keep in mind that the lower your credit score is, the higher the risk is for you not to qualify and get approved for a loan. Although having a low credit score may not fully disqualify you from getting a loan, buying a car, or getting your insurance policy, the process of getting one will definitely take a while as the assessment could take longer.
Aside from that, more documents may also be requested from you to further establish your capacity to pay and fulfill your financial obligations. Below are the factors that may affect your credit rating for your reference.
- Payment history – this makes up about 35% of the overall criteria that is used in determining a person’s credit score. As such, this is known as the most relevant element in assessing your credit rating. This will tell lending organizations about your past and existing spending and payment patterns. Simply put, it will reflect your ability and credibility to pay the loan amount that you are asking for.
Under this element, you can ask yourself the following questions to help you assess if the payment history piece of your financial report can help you get a good credit score or not.
- Have you been paying your expenses or credit card bills on time for all the accounts that are reflected in the credit report? Keep in mind that for obvious reasons, not paying on time will certainly have a negative impact on your credit score. Any missed payments will show up on the report and will be visible to various lending organizations
- If you missed a payment, how late before you could settle it? Did it take a month, 2 months, or 3 months? Missing a payment on the due date is already bad, but paying them really late could make it worse. The longer it will take you to settle the amount, the uglier your credit score will look like.
- Did you have any credit card or loan that you were not able to pay and have gone to a company’s collection group or agency? This one is big and can really affect the way a lending institution can look at your capacity to pay. This goes back to the previous items, which state the importance of making sure that you pay promptly or if you missed a payment, to settle it the quickest possible time.
- Was there any legal suit filed against you? Did you have an unpaid credit card bill that was transferred or absorbed by another card to extend its payment terms? Have you experienced any loan settlement agreement because of your inability to pay? These are situations that you do not want to be in as they will appear on your credit report and will affect your credit score. Lending organizations view this negatively when it comes to your credibility to pay and face your financial obligations accordingly.
- Existing debts – this is the second item that you need to consider when it comes to importance and impact to your credit score. As a matter of fact, this makes up the 30% of the overall credit score criteria. For this section, you may ask yourself the following questions to understand how the money you owe/owed can affect your credit score.
- How much have you spent from the overall credit limit given to you? Keep in mind that the lesser money you owe, the higher it is for you to get a good credit score. While maintaining low debts can work for you, you also should remember that not using the loan granted to you is not good as well since this would mean that lending organizations will have nothing to assess. They need to see your spending and ability to pay so make sure to use the loan given to you even the small portion of it if you do not really need it yet. This will show how responsible you are in fulfilling your financial duties.
- In total, how much are your credit card usages/bills, auto loan or other loans, installment arrangements, and the likes? This will either work to your advantage or the opposite. Showing various accounts that you can manage or pay promptly is certainly a good sign. The opposite of that, of course, will turn off lending institutions and bring your credit score down. Because of this, it is important to keep an eye on your finances and know their due dates to prevent you from missing any payments. Put them on your calendar as you find appropriate.
- Duration of credit report – as mentioned earlier, a credit score is generated using an individual’s credit history such as past spending and payment pattern. As such, just like the last item shown above, this element can either work to your advantage or totally break you.
A credit report showing a longer duration of your finances will impress a lender if you were able to manage all the accounts on the report well. A lender will specifically look at the number of years your credit has been active, how old the first credit is, and if you have been paying them timely. If yes, you will certainly get a good rating. Otherwise, you may expect to not qualify for a loan or go through a more stringent process based on the credit score that you will get. This element makes up 15% of the total credit score criteria so it must still be given high priority.
- New credits – aside from the history of your finances, a credit score will more importantly be based on the most recent information on your credit report. This will include new credits that you have availed of or have not paid yet. This element makes up 10% of the credit rating parameter.
Under this element, a lender will be interested to find out how many new accounts, purchases, or loans are reflected on your credit report. They will also check how much the total amount is. If you have acquired a lot recently, it may bring your credit score down as those recent credits have just increased the risks of you not being able to manage your finances more easily.
For example, if your credit rating is being reviewed due to your mortgage application, then the bank will review your current monthly financial obligations to determine how much more you can afford. But if it will show that you have a new credit card, then it will create a perception that you plan to use it and purchase a number of items soon. This situation may put you in a very tough financial situation and eventually cause you to be a delinquent payer.
- Types and numbers of credits in use – the last thing to be considered in the FICO credit scoring process is to determine if you have a good mix of credit accounts like your credit card, installment expenses, loans, insurance, etc. They will find out how much credits you have used per account, how much they are in total, and how good your payment pattern is. Being able to manage various accounts and not missing a single pay will appear really good in the eyes of a lending organization. This information will determine the right credit score for you.
What is Considered a Good Credit Score?
A FICO credit rating ranges from 300 to 850. As an individual who aims to get a good credit score, what exactly is considered a good credit score? What do lending organizations consider an acceptable credit score and what is totally unforgivable?
In the eyes of a lending institution like a bank, a credit score of 700 or higher is normally considered a good credit score rating. A rating of 800 or higher than that is given to excellent debtors. Based on record, most people fall within the range of 600 – 700 range when it comes to their credit score achievement.
As explained earlier, the higher your rating is, the more credible you are in the eyes of a lender when it comes to paying your debts. Having a good credit score is what most people need to work on to qualify and get approved for a loan.
Based on the FICO credit scoring system, below are the credit score ranges and what they imply on the part of the lender. The information below also shows how a certain credit score will impact an individual’s desire to get a loan.
- 300 to 579 – a credit score within this range is considered a very poor credit rating. About 17% of people fall under this category. If you have received a credit score within this range, then applying for a loan will be more difficult or could even be impossible. In some cases, an applicant may be asked to pay a certain fee or deposit a big down payment to qualify. Most of the time, individuals with this credit score might not get approved for a loan at all.
- 580 to 669 – this range is considered as a fair credit score. About 20% of people get a credit score within this range. Individuals with a credit score within this bracket are known for being delinquent in paying their financial obligations.
- 670 to 739 – this credit score bracket is known to be good and covers about 21% of people applying for a loan. Based on records, about 8% of applicants coming from this group are more likely to miss their payments and become extremely delinquent in the long run.
- 740 to 799 – this score range is known to be very good and only 18% of loan applicants fall under this category. If your credit score is within this range, then expect to get better rates and offer from lending institutions.
- 800 to 850 – a score within this bracket is excellent and about 19% of people applying for a loan belongs to this category. Applicants with this rating will get the best rates and offers from lending organizations.
This graph gives you a better understanding of the distributions of credit scores among people
(Picture from Experian)
How to Check Your Credit Score
Credit scores do matter. With that simple reason alone, it is important for a person to understand what his credit score is and how it affects his or her financial wellness and credibility. This is especially important to those who are planning to apply for a mortgage to buy a home, a car, or any big purchases. A good credit standing will be beneficial to a person as it will qualify him or her for lower interest rates and better loan offers from lending organizations.
Below are some of the ways to check your credit score.
- Using FICO credit score – if your credit score is generated using the FICO credit scoring methodology, then you can simply go to the site of FICO to view your credit rating directly. Many lending institutions are using the FICO credit score process in generating the credit score of a person and making decisions. It can be requested from the site for a certain fee. To generate your credit rating from the FICO site, just sign up and track your credit rating online. You may access the site for free for 10 days. After the said period, a user will have to pay to continue to access and monitor their rating online.
- Getting in touch with credit agencies directly – if you are in the United States, there are 3 credit reporting agencies that can prepare your credit report for a certain fee. These credit reporting agencies are Experian, TransUnion, and Equifax. You can buy a full credit report directly from these agencies. Each of them offers a website where you can request or purchase your credit report directly. To get access to your credit score, you will be asked to provide your personal identification details.
The login process requires a user to answer questions that only he or she can provide such as the Social Security Number or monthly mortgage payment. It is recommended to get a full credit report plus your credit score so you can review the accuracy of your credit report.
Keep in mind that your credit rating is dependent on your credit report. Any error on the report can affect your rating. Hence, the report must be reviewed carefully and errors should be disputed and reported to the appropriate credit agency immediately.
To get started, you will need to provide your personal information, answer some security questions, and give out your credit card details. Users are given a credit report for free annually. If a user has already used this free credit report but he or she needs to access the report again, then a certain fee may be charged going forward.
Be aware as well that each credit agency offers a 3-in-1 report containing the credit report and credit score from the 3 credit agencies. Each has set a fee to purchase one’s credit report and rating.
- Use credit monitoring facilities or services – a credit monitoring service lets a person track all the activities on his or her credit report for a period of 1 month. This facility is available to consumers to get their credit score for a monthly rate.
A credit monitoring service can be beneficial to consumers who had been victimized of character or identity theft. This also works for those who simply wish to keep track of their credit report on a regular basis. This service is available through the 3 credit reporting agencies namely Experian, TransUnion, and Equifax by visiting MyFico.com. Be aware as well that 3rd party agencies offer the same services, but you need to make sure that they are licensed or legally allowed to operate prior to working with them.
Also, it is important to know that some credit monitoring facilities will automatically report changes on the credit report to the affected users while there are others that will wait for the user to log in to their sites to let them know of the changes that are reflected on the credit report. Most of these services will also let consumers view their updated credit scores monthly.
When choosing a credit monitoring facility, make sure to take into consideration your safety, the security of your information, and its accessibility. Ideally, get a service that will provide you with a monthly update about your credit score. Getting updated about your credit score will be helpful due to the following reasons:
- You will be able to get daily alerts and this will help you monitor your credit score regularly. This will also help you know if there are any unusual activities on your credit report and dispute them right away.
- You will get protected from lost or stolen properties. For example, if your ATM or credit card is stolen, the service will allow you to cancel the card immediately to prevent any unauthorized usage.
- You are insured in case of character or identify theft. Yes, a credit monitoring service also offers insurance against this crime.
- Get your credit report for free – the last option for consumers to check their credit score is to get an annual report for free by visiting AnnualCreditReport.com. This free credit statement is provided due to the Fair Credit Reporting Act, which requires the 3 major credit reporting agencies to provide their clients a report on their credit at no cost on a yearly basis. This credit report can also be requested by giving 1-877-322-8228 a call.
These options are available as you should not call or contact the credit reporting agencies directly. On the other hand, be aware that you can only get your actual credit score from the credit reporting agencies – this will come with a cost. Alternatively, an individual can also fill out a form found on the FTC site to request for a credit report.
The completed form should then be mailed to the Annual Credit Report Request Service at this address:
PO Box 105281,
Atlanta, GA 30348-5281.
The said form may be accessed directly from this link – https://www.consumer.ftc.gov/articles/pdf-0093-annual-report-request-form.pdf.
If you are on the AnnualCreditReport.com site, choose your state or location and provide personal information that will be requested such as your full name, complete address, social security number, and the likes. Be sure to provide accurate information all the time. Afterwards, be ready to answer several questions about your finances.
Since credit scores are based on a person’s credit history, be prepared to submit all the details so an accurate assessment of your finances can be made. Be assured that your identity and information will be fully protected and will only be used as intended.
Information that you need to provide will include any existing mortgages that you have, credit card details, and other personal information. Tricky questions may also be thrown at you to test the precision and consistency of the information you are giving.
Once the credit report is generated, it is recommended to print them out so you can go over the credit information easily. Any error should be reported instantly as it can affect your credit score negatively. A credit report error may include transactions that are not yours or personal information of another person. And since a user is only eligible for one credit report for free per year and it can’t be accessible anymore later, it will be best if you would print them out and make copies as you need. Take note that a credit report does not display one’s credit score.
Does Checking your Credit Score Lower it?
It has been mentioned earlier that it is important to be fully aware of your credit score on a regular basis. But what impact does it have on your credit score? Does it reduce your credit rating every time you or some credit institution checks your credit score? To answer this question, you should understand that credit inquiries have 2 types – soft inquiry and hard inquiry. Below is an explanation of what each type is and how it affects your credit score.
Not everyone can look into your credit report or credit score. There are only a few persons or institutions who are legally allowed to view or review your financial history. These are the banks, other lending institutions, insurance organizations, landlords, creditors you already have a debt with or the one you plan to deal with, potential employers, utility firms, and the likes. You as the owner of your credit report and score can also authorize any person to review them if needed.
Identifying whether the inquiry on your credit report is soft or hard depends on who is requesting for your credit report or who is using it and what the purpose is. When a lending company or any of the businesses mentioned earlier gets your credit report and reviews it to process your loan application or subscription to their services, then it is considered a hard inquiry. This type of inquiry will reflect on your credit statement and can be used to assess your credit rating. Keep in mind that each hard inquiry will be displayed on your credit report. This means that the more hard inquiries there are on the report, the more likely that your credit score will be pulled down.
On the other hand, soft inquiries on your credit report do not have the same impact on your credit score. They do not reflect on the credit history, thus will not affect a user’s credit rating. A soft inquiry usually occurs when a person or potential employer views your credit report only for background check purposes. Reviewing your personal credit statement is also considered as a soft inquiry. This only means that a user can check his own credit report as often as he wants without the fear of negatively affecting his credit score.
What Happens to Your Credit Score When You Cancel a Credit Card?
At one point in your life, you may decide to just cut your credit card as part of your plan to better manage your finances. For most people, having a credit card is not good as it encourages a person to spend more than what he or she can afford. While this can be seen by your family or friends as a mature decision to make, take it easy as your action may affect your credit rating.
Keep in mind that closing your credit card or not using it will not increase your credit rating. While it can improve your finances or regular spending, it will have no direct impact on your credit score specifically. Remember that your credit rating is based on your financial history. Cutting your credit cards does not erase your credit history from the report. It will also not exclude your past credit card usages from the credit report review to identify your credit score.
Therefore, if you are only planning to discontinue your card thinking that it will improve your credit rating, think twice and reconsider your plans. But if cutting your credit card, after paying it in full, will allow you to manage your finances better and let you pay your other loans promptly, then go ahead and do it. Be aware though that the impact of your action will not instantly show up on your credit report or credit score. You will benefit from it as soon as your credit history improves and when your credit report is extracted for review.
Does Debt Consolidation Affect your Credit Score?
Debt consolidation is the process of getting a new loan that is bigger than your existing one to pay all or some of your unpaid debts. The idea is to be able to pay off multiple loans and then just be obliged to pay only one account on a monthly basis. This works if getting a new loan with a lower interest rate is possible to pay off an existing debt that generates bigger interest rates.
All of us want to experience financial freedom or to be free from debts. Debts, loans, and other financial obligations can be costly and are preventing us from being financially stable. The presence of those financial debts makes us indebted to creditors and prevents us from enjoying our own money. Because of this, an individual may take actions to pay off his debts and eventually enhance his financial standing.
There are various options to consider. One can state bankruptcy as one of the options, but this will negatively impact a user’s credit standing. This may also give a person a hard time to request for a credit next time. Bankruptcy also does not discharge all debts.
Alternatively, an option a person may consider is just to ignore the debt. In doing so, the debt will disappear from the report 7 years or longer depending on the credit institution’s policy and the local laws in a certain country. While this may sound okay, this will have a major impact on your credit until the outstanding balance is removed from the record. Plus, this will come with annoying calls from collection agencies and threats to face legal charges.
Another option a person may consider, which this article will discuss in detail, is to go through debt consolidation. But will it affect your credit report and your credit rating? Is it a recommended strategy to take?
Unfortunately, debt consolidation will have an impact on your credit report and your credit rating. Remember the 2 types of credit report inquiry that were presented earlier? Debt consolidation, regardless of how you plan to do it, either by applying for a new loan or having a new credit card absorb your current card expenses, will require the creditor to look into your credit history. This is considered as a hard inquiry and it will certainly reflect on your credit report and can bring your credit score down.
But debt consolidation is not entirely useless. There are means to make it work for you. There are just a few reminders that you need to be aware of to make sure that the process of debt consolidation will be beneficial to you.
- Keep in mind that your credit score is somewhat based on your credit utilization. If your existing cards are all used up, activating another one will increase your available credit and this will trigger your utilization ratio to get lower. This will improve your credit score. However, keep in mind that your credit rating will get dinged significantly the moment your new card or any of your cards is used for huge purchases.
- If you are getting a new loan to fully pay your existing debts, your utilization percentage will go down and will cause your credit score to increase. However, for this to perform to your advantage, you have to keep your credit cards active even after they have been fully paid. And remember that your score will go down if you start using the cards again as it will increase your financial obligations.
Do Student Loans Affect Credit Score?
Similar to any type of loans, a credit score will benefit from a student loan if it is paid promptly. The 3 major credit reporting agencies, Equifax, TransUnion, and Experian, consider student loans as installment plans. Hence, if you pay it on time and in full based on the amount due, the said credit agencies will put that on your credit report monthly. This can then be interpreted by future lending organizations that you are a responsible debtor. And as you may already know, anything in contrast, like if you miss any payment or did not pay in full, will cause your credit score to drop.
How does Bankruptcy Affect your Credit Score?
Many people are discouraged from declaring bankruptcy because of the unfavorable impact it has on a person’s credit standing. Normally, a declaration of bankruptcy will be displayed on a person’s credit report for at least 10 years and this will extremely hurt one’s credit rating. However, not declaring bankruptcy while letting your debts accumulate and get in the hands of collection agencies will also affect your credit report and credit rating negatively.
Bankruptcy is expected to cause a person’s credit score to plunge anywhere between 160 and 200 points, which will bring the score within the poor or fair credit score range. This will certainly make it difficult for lenders to grant you a loan next time or prevent you from applying for a credit card.
When this happens, all a person can do is be patient and let time take its course to gradually improve his credit history. Additionally, you have to make sure that your future loans, no matter how small they are, are paid on time. Doing so will absolutely improve your credit standing in the eyes of the lenders out there eventually.
How Many Points does a Repossession Drop your Credit Score?
In some countries, owning a car is not optional as having none may make it impossible or very difficult for a person to come to work or go from one place to another. While owning a car brings a lot of benefits, it can also cause a lot of challenges including financial difficulties.
If you own a car, but you are having difficulties paying your monthly dues, losing your car is the next clear thing to happen. And this will bring a list of other problems.
Car repossession will have a negative impact on a person’s credit history and rating. This activity is reported to the 3 major credit reporting agencies, thus will affect and lower your credit score for sure. There is no specific number of points also that will indicate by how much a person’s score will drop due to car repossession. It will depend on one’s credit history and current financial sources.
Why did My Credit Score Drop?
There are various reasons that could cause a credit score to drop. If you are not sure what has caused yours to plunge, review the list below as one of them could be the reason.
- Your credit score may drop if you have a loan or a credit card expense that remained unpaid after due date or for more than 30 days. Keep in mind that a person’s credit history has a major impact on his or her credit rating. Late payments or those that are made after 30 days get reported to the major credit agencies and are then used to determine your credit rating.
- Making huge purchases on your credit card can also lower your credit score. Aside from credit history, the amount of your available credit can also affect your credit score. Making a huge purchase means that your available credit will go lower and that you have an additional debt to pay. This will decrease your credit score. And even if you pay the said purchase in full on time, it may still impact your credit score due to timing issue – the time when the balance was reported on the statement versus when the payment was due and made.
- Having an outstanding balance that was sent to collection agencies can certainly cause your credit score to drop. To make sure that your credit score is intact, you have to pay all of your obligations, not just your loans or credit cards. Example would be a monthly telecom plan or cable TV subscription. Sending of these outstanding payments to collection agents is part of the collection process of many companies.
- You applied for a new credit card or loan. Every time you submit a new request for a loan or credit card, a lender or credit card company will look into your credit history or credit report. This is considered a hard inquiry and will be displayed on your credit report and will certainly bring your score down by a few points.
- Decreasing your credit limit will also lower your credit score. The logic here is like when you make a huge purchase on your credit card. When your credit limit is decreased, then your credit utilization will go up, thus decreasing your credit score.
- Closing your credit cards will also negatively impact your credit score, regardless if the card has a balance or not.
- There could have been an error on your credit report. If your credit score drops immediately even if there had been no unusual activity on your credit card or loan, then an error may have caused it. Make sure to review your credit history in this situation so you can dispute the errors immediately.
Having a Good Credit Score is Important Because…
Maintaining a good credit rating is important because of the following reasons:
- A person with a good credit rating can qualify and get approved for a loan. He or she is also eligible to get the lowest rates and best offers from lending institutions. This is important as every person may be in need to get a loan at one point in his or her life.
- A good credit rating is required if you are planning to buy a home. This is a big investment and only a person with a good financial standing may be approved to get one.
- Like item number 2, having a good credit rating is also necessary in buying a car. This is one of the major purchases an individual makes when he gets more financially stable. But this financial stability has to be reflected through a good credit rating. If you have a low credit score, then getting a car may take longer and you may be required to pay higher than the normal down payment.
- It is also needed if you are thinking of starting a new business. Most of the time, a person may need to get a business loan to get started. And as explained earlier, the qualification to get a loan will depend on a person’s credit rating.
- Lastly, a credit score may also be used for employment background. Many companies nowadays perform a credit check on their applicants before employing them. This is more common in financial and government sectors.
What Credit Score is Needed to Buy a House?
If you are thinking of getting your own home, but you are not sure if your credit score will qualify you to get one, then be aware that there is no specific credit score required to apply for a housing loan. But this does not mean that you can be totally be unaware of your credit score. It is recommended to be updated of what your credit history is and how it is affecting your credit score on a regular basis. Checking your credit score and credit report regularly will not impact your score negatively so there is no reason why you should not do this.
When buying a home, a lending institution, a bank, or a seller will first look into your credit score before anything else. There is no recommended or minimum credit rating that one should aim for before deciding to buy a house. The requirement may change depending on the lender, your actual financial history, economic performance, and many others. A 750 credit score, which is known to be within the very good credit rating range, may still get denied for a housing loan during an economic downfall or recession.
What is a Good Credit Score to Buy a Car?
Like in the previous item, there is no recommended credit score to buy a car. As long as your credit score is good and all the other factors such as the economy, interest rates, etc. are performing okay, then a person may be approved to get a car loan. As a matter of fact, having a low credit score may not immediately disqualify a person from getting a loan, although people receiving a loan for a new car have an average credit score of 714.
In this situation, however, the loan process will take longer, more paper works may be required, and higher initial payment may be requested from the individual. A person’s credit score may also dictate the type of car he or she can get, a brand-new car or used car, and the value an individual may avail of. Once you have been approved to get a car loan, what is important is to pay the monthly amortization timely and not to miss a single payment. This will improve your credit score and will qualify you to get a loan again in the future.
Best Ways to Improve your Credit Score
Improving your credit score is necessary especially if you are planning to get a loan or get a credit card in the future. A credit score reflects your financial wellness and credibility hence you must pay full attention to it. Below are simple ways to improve your credit rating.
- Monitor your credit card and loan due dates and balances. A credit score is determined by looking into an individual’s credit history. A missed payment will be displayed on the credit statement and will certainly affect a person’s credit rating. If you want your credit score to remain okay, make sure to watch after your financial obligations and that they are paid on time.
- Pay off your credit card expenses. To keep a good credit score, make sure to clear any outstanding balance on your credit card. If you cannot pay it in full, pay more than the minimum amount on time.
- Let old debt stay on your credit report. Some people are mistaken for believing that they should clear their credit report from previous debts. That is certainly incorrect. You should remember that your credit score is based on your financial history. It does not matter if you have an old debt in your account as long as it has already been paid in full. This will mean that you are a responsible person who will not allow a debt to stay unpaid.
- Pay your bills promptly. One of the major reasons why a credit score of an individual would drop is paying bills untimely. This delinquency will reflect on one’s credit report and will certainly affect his or her credit rating. To keep it within the good range, a person has to ensure that his financial obligations are managed well and payments are made on or before the due date.
- Take it easy on your purchases. If you have been approved for a loan to get a house, the next thing a new homeowner may want to get himself into is to decorate it or fill it with really nice appliances or furniture. This will significantly increase your purchases and may put you in a difficult financial situation. This may cause you to miss payments and cause your credit rating to drop.
How Long does it Take to Improve your Credit Score?
If you are interested to find out how quickly you can improve your credit score, well, it depends on what caused your credit rating to be within the range where it is now. For example, if your credit rating is low just because you do not have a strong credit history, maybe because you have decided not to use your loan or credit card, enhancing your credit score may take only months. All you need to do is start using your credit card to display some usages and payment patterns on your credit report. If you have outstanding debts, paying them off will eventually improve your credit score. This, however, may take longer or will depend solely on how fast you can settle your unpaid bills.
Also, the fastest way to improve your credit score is to pay all your debts and improve your credit utilization. Activating a new credit card will quickly enhance a person’s credit utilization as long as purchases on the new card are controlled and paid on time.
Another way to quickly increase your credit score is dispute any errors on the report that may have dragged your score down. Removing these errors is expected to have an instant impact on an individual’s credit report.
Fastest Way to Build Good Credit
A good credit standing will benefit a person in many ways. Because of this, it is important for an individual to know what the ways are to build a good credit standing quickly. Below are the steps for reference.
- Clear your credit report of items that have caused your rating to go down. To do this, it is important that you get to receive a copy of your credit report regularly. Review the list and take note of the items that may have pulled your rating down. These items could include an unpaid balance on your credit card or late payments that were made. Depending on what the reason is, make sure to address them going forward. Pay any outstanding bills and make sure to make payments on time.
- Pay as much as you can. The secret to maintain a good credit rating is to not allow your loans or credit card bills to accumulate. Hence, pay your bills and eradicate as much as you can. If you cannot pay the whole amount, make it a point to pay more than the minimum amount stated on your credit card bill.
- Timing could hurt your credit score badly. If you have made huge purchases on your credit card and paid it in full, it can still affect your credit score if only the purchases appeared on your credit report due to timing issue.
- Have your credit limit increased. Doing this will improve your credit utilization and will positively impact your credit score.
- Activate a new credit card. This works like the item above. Getting a new card increases your credit capacity, thus improving your credit utilization. This will improve one’s credit rating.
- Negotiate settlement of delinquent accounts. If you have a delinquent account that is already with a collection agency, negotiate for an easy payment scheme so you can pay it off in full.
Check out this video on improving your credit score fast by considering how you utilize your available credit.
How to Dispute an Error on your Credit Report
Correcting errors on your credit report is necessary as it is one of the ways to improve your credit rating. An error may have caused your credit score to go down, hence fixing must be done instantly to prevent further impact on your credit standing.
- If you see any error on your credit report, you can dispute it by reporting the errors to any of the 3 major credit reporting agencies responsible in preparing your free annual credit statement. Inform them in writing about the errors you have seen by mailing them a copy of your findings. It is recommended to mark or highlight the incorrect items on the report. The credit agency will review your dispute and get back to you within 30 days or longer depending on how many the errors are or how complicated the issue is.
- Inform the bank or lending institution that have seen your incorrect credit report that you have disputed the report due to the errors you have noted.
- A credit report also has a section that will allow you to report or dispute it. Simply return the form to the address provided and expect an update within 30 days.
If you’re in a situation where you find an error in your credit report, then go ahead and check out this page.
How to Get My Credit Score Above 700
A 700 credit score is the minimum rating within the category of “good credit rating. Having this credit score or anything higher will qualify a person to better loan proposals, low interest fees, and the likes. A clear-cut process to raise your credit score to 700 does not exist. This is because of the fact that there are different ways to improve one’s credit report and rating.
- To start, it is necessary for a person to have a good credit history. Your debts should be paid on time and in full if possible. If you can’t pay the whole amount due, make sure to settle more than the minimum amount due.
- Reducing your total amount due or your total payables will also help give you a good credit rating.
- Get as much credit history as you can. Keep in mind that a credit score is based on financial history. If you have unused credit cards, start using them to get some entries on your credit report. Just make sure to pay your bills on time.
- Avoid new loan application. This new loan will not only add up to your payables; a new loan application will also require a lender to look into your credit history. This will reflect on your credit report and may lower your rating.
- Enhance credit mix. A credit mix is having different types of loans. This will appeal to a lender especially if you are able to manage them properly. This could mean having a credit card, a bank loan, an internet subscription, an insurance, and the likes.
How Tax Liens Affect your Credit Score
A tax lien is an interest imposed legally upon a house or any property to guarantee payment of various taxes. It may be required for unpaid taxes on real properties or personal properties. It can also be imposed as a result of an individual’s failure to settle income taxes or other types of taxes.
Most tax liens are scheduled to be eliminated from an individual’s credit report, but the items that will stay can seriously hurt one’s credit rating. Normally, a tax lien is filed by the government against an individual for missing to pay an income tax, property tax and other types of taxes. In the eyes of a lending institution, this could mean that you are an irresponsible borrower. This will, of course, reflect on your credit history and affect your credit rating negatively.
Low Credit Score Home Loans
A person with a low credit score may not automatically be disqualified from getting a home loan. While it is a possibility, a person may still be granted a loan, but with the following conditions:
- The borrower will go through a longer loan process.
- More paper works or additional financial documents may be required.
- More proof of identification documents may also be requested from the borrower.
- Higher down payment or interest rates may be required from the borrower as well.
The conditions above may change depending on the lender or the seller. Make sure to negotiate properly to get the house loan that you need based on your financial capacity and what the bank or lender can grant you based on their policies.