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Zack Friedman

Getting an excellent credit score may be easier than you think.  Here are 5 easy ways for you to increase your credit score:

Why Your Credit Score Matters

For better or worse, your credit score is the gateway to an array of financial products such as mortgages, auto loans, personal loans, credit cards and private student loans.

Your credit score also may be used when you apply for insurance, rent an apartment or purchase a cell phone.

FICO credit scores are among the most frequently used credit scores, and range from 350-800 (the higher, the better). A consumer with a credit score of 750 or higher is considered to have excellent credit, while a consumer with a credit score below 600 is considered to have poor credit.

5 Ways To Increase Your Credit Score

1. Double check your credit reports for accuracy

It’s essential that you obtain a copy of your credit reports and check it carefully. Why?  The Federal Trade Commission found that 5% of consumers had one or more errors on their credit report. There are three major credit bureaus: Experian, Equifax and TransUnion.

Each credit bureau collects information on your credit history and develops a credit score that lenders use to assess your riskiness as a borrower. Under federal law, you are entitled to view your credit report every 12 months from each credit bureau. Since each credit bureau may have different information about your credit history, your credit score may vary across the three lenders.  For a free copy of your credit report, you can visit Annualcreditreport.com.  If you find an error, you should report it to the credit bureau immediately so that it can be corrected.

2. Show you have a healthy financial track record

To demonstrate that you are financially responsible, you need to develop a financial track record in good standing.  Your payment history is one of the largest components of your credit score. To ensure on-time payments, set up autopay for all your accounts so the funds are directly debited each month.  FICO scores are weighted more heavily by recent payments so you can “override” a past missed payment by developing a pattern of more recent on-time payments. Therefore, if you have a delinquent payment, pay off the balance.  It also means not skipping any payments because missed payments can also hurt your credit score. Missing a payment can stay on your credit report for seven years.  Credit bureaus also look at your account age, which is how long your accounts have been open and in good standing.  The longer that you can keep open a credit card in good standing, the better (so that you can increase your account age).

3. Manage your credit card utilization

Lenders evaluate your credit card utilization, or the relationship between your credit limit and spending in a given month. If your credit utilization is too high, lenders consider you higher risk.  Ideally, your credit utilization show be less than 30%.  If you can keep it less than 10%, even better.  For example, if you have a $10,000 credit limit on your credit card, ideally you should spend less than $1,000 in a given month.  Here are some ways to manage your credit card utilization:

  • set up automatic balance alerts to monitor credit utilization
  • ask your lender to raise your credit limit (this may involve a hard credit pull so check with your lender first)
  • pay off your balance multiple times a month to reduce your credit utilization

4. Improve your debt-to-income ratio

Many lenders evaluate your debt-to-income ratio when making credit decisions, which could impact the interest rate you receive.  A debt-to-income ratio is your monthly debt payments as a percentage of your monthly income.  Lenders focus on this ratio to determine whether you have enough excess cash to cover your living expenses plus your debt obligations.  A lower debt-to-income ratio should be your goal because it means you have more income that can be used to pay for new debt such as a loan.  Two ways to lower your debt-to-income ratio: either pay off outstanding debt or earn more income (or both)

5. Consolidate credit card debt with a personal loan.

If you have credit card debt, the good news is that you can do something about it.  One option is to consolidate your credit card debt into a single personal loan at a lower interest rate than your current credit card interest rate.  A personal loan therefore can save you interest expense over the repayment term, which is typically 3-7 years depending on your lender.  A personal loan also can improve your credit score. Why?  A personal loan is an installment loan, which means a personal loan carries a fixed repayment term. Credit cards, however, are revolving loans and have no fixed repayment term. Therefore, when you swap credit card debt for a personal loan, you can lower your credit utilization and also diversify your debt types.

This article was written by Zack Friedman from Forbes and was legally licensed by AdvisorStream through the NewsCred publisher network.

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