What is credit history? What is a credit score? How and why to increase it? How to improve credit score for mortgage?
Our experts tried to highlight this topic. Below you will find not only answers to questions but also useful tips that you should use on the way to gaining an excellent financial reputation.
Table of Contents
- A little more about credit history
- Why do you need a credit history?
- Credit history in the USA: how to start
- What is a credit score and why improve it?
- What things make up your credit score?
- 11 steps to improve your credit score fast
- How to check your credit report
- Frequently Asked Questions
A little more about credit history
Credit history is a measure of your financial strength. It plays an important role in the life of every U.S. resident. Be prepared for the fact that your credit history will be checked when renting a house, sometimes even when applying for a job. Do you want to take out insurance, buy household appliances or a take a car loan? The same picture: first of all, the lender will check your financial integrity.
In the United States, the attitude towards credit is significantly different from other counties. For some, the main indicator of solvency is no debts. Americans, on the contrary, actively use credit cards not only for expensive purchases but also for daily expenses. Therefore, the proof of Americans’ financial stability is their active credit history.
Why do you need a credit history?
A credit history in the USA allows you to receive favorable financing offers and increases your borrowing limit. Data about it are formed in the credit report. Every US resident has the right once a year to receive a free report on their finances from credit agencies: Equifax, Experian, TransUnion. Use this opportunity to monitor the relevance and correctness of the personal data contained in it about you and your financial transactions.
Below are the top 11 reasons why you need credit:
- to get a phone
- to get a job
- to rent an apartment
- to buy a home
- to get a car loan
- to finance a funeral
- to get car insurance
- to get a credit card
- to finance furniture
- to finance jewelry
- to get a business loan
Credit history in the USA: how to start
Credit history begins with the receipt of the first credit card. It is worth noting that immigrants often face refusals to receive it. The bank will not issue you a credit card without information about your financial reliability, and you can prove it only by using a loan. It turns out a vicious circle, but there is a way out of it, and not one!
- Secured credit card. A secured credit card is nearly identical to an unsecured credit card, but you’re required to make a minimum deposit (known as a security deposit), to receive a credit limit. The deposit is typically $200, but may be higher or lower depending on the secured card you open. You spend money and regularly replenish your account up to the initial amount. In this way, you will demonstrate your ability to manage funds. In six months or a year, you will be able to get a standard credit card from the bank.
- Credit card from a major department store or gas station. This is a good way to start a credit history in the US. Retail chains such as JC Penney, Target or Macy’s issue prepaid and regular credit cards. You are required to have a social security number and a stable source of income. Of course, this card can only be used in the store that issued it and topped up regularly. But these actions are also taken into account in the credit history.
- Car loan. Taking an auto loan is another effective way to prove that you are a trustworthy person. Many American car dealerships have special programs for people without a credit history. Taking a car loan and paying regular installments demonstrates your financial responsibility.
- Payday loan. This is the easiest way to start your credit history quickly. You can take out a payday loan online for any purpose around the clock. Amounts typically range between $100 and $1,000, and lending terms usually do not exceed 31 days. Such loans are small-dollar but they have a long-lasting impact on your score. Read more about how payday loans affect your credit history in the opinion of financial services professionals and financial advisors.
The credit history is also positively affected by the presence of long-term settlement and savings accounts. The bank can characterize the client as a future borrower based on the movement of funds on these accounts. Therefore, having a personal account also helps start your credit history.
What is a credit score and why improve it?
A credit score is a concern for many people who are about to take out a loan. If you have a low score, a loan is likely to be denied.
What is a credit score? A credit score is a tool for assessing a person’s solvency, which is calculated based on various indicators using statistical methods. The rating is used by banks and microfinance institutions that issue payday loans.
How do you figure out your credit score? The exact credit score cannot be known in advance. The reason for this is the use of different data when calculating the final rating. Since competing banks may not share information with each other, one financial institution may not be aware of a person’s bad credit history at another bank. In this scenario, the credit score will be different. A FICO score above 670 allows you to get a loan. At the same time, information about bad debtors is usually known to all banking institutions. According to the Bankrate website, the largest organizations in the world that collect information about loans and debtors are Experian, Equifax and TransUnion.
What is a good credit score? The most common tool for credit scoring is the use of the FICO rating. The score takes into account the various periods of the borrower’s credit history and is considered a benchmark for the bank in terms of issuing a loan and the expected chances of its full repayment. The FICO score ranges from 300 to 850. A score above 670 is considered good, and a score above 800 is exceptional.
What things make up your credit score?
The financial reliability and responsibility of American residents is measured in points. The FICO score company is the developer of the solvency scale. It consists of 4 blocks (Excellent, Good, Fair, Bad), and the calculation starts from a minimum of 300 points to a maximum of 850. You can view your credit score at www.myfico.com.
FICO rating scales range as follows.
- 300-639 – you are likely to be denied a loan;
- 640-699 – you have more chances to get approval, but the guarantor may be required; most likely, the lender will reduce the requested amount;
- 700–749 – you are likely to get approved for a loan with an affordable interest rate;
- 750-850 – you can get very favorable loan terms and choose the bank and type of loan, as well as bonuses in the form of insurance or loan rate variability.
An infographic given below shows how a credit score is calculated:
11 steps to improve your credit score fast
Below are the tips on how to improve your credit score in 30 days.
1. Pay bills on time
Payment history is one of the most important indicators that is checked by the three main credit reporting agencies in the US (Equifax, Experian and TransUnion) when determining a credit score. And timely payment of bills can significantly improve the credit score. This category accounts for about a third of all credit rating scores, with a minimum of 300 and a maximum of 850.
Late payments can seriously reduce your credit score. Therefore, if you have already delayed any of the payments, pay it as soon as you can, and try not to miss payments in the future.
Well, if you want to be punctual when paying bills and comply with obligations to the bank, thereby demonstrating your reliability and high level of responsibility, use one of the following methods:
- write down due dates on a paper calendar;
- download one of the apps for accounts and budgeting;
- set up automatic payments on your accounts.
If it is not possible to pay the full amount, be sure to make at least the minimum payment before the final repayment date.
By the way, if you use credit accounts without delays in payments for 2-3 years, you will have access to credit cards with nice bonuses. They may provide extra miles, discounts, special conditions, minimum interest rates, etc.
2. Use credit cards wisely
If you use credit cards correctly, you can improve your credit score in a short time.
For this you need:
- pay bills on time every month, creating a positive payment history;
- keep card costs low by creating a low utilization rate. It is better not to spend more than 30% of the total amount of the credit limit. As practice shows, for people with the highest credit score, the utilization rate of credit funds is 7-10%.
And if you’re worried you’re overspending on one of your credit cards, get credit cards for recurring expenses. To do this, put a small recurring payment on the received credit card, set automatic payment and put it in the box. There may be several such cards. They will help you build a good credit history so you don’t have to worry about a big bill or a missed payment.
3. Increase credit limit
Another effective way to increase your credit score is to increase the total available credit limit. This reduces the leverage ratio. Naturally, this method will only work if you do not exceed your monthly card credit.
There are two tips on how to quickly improve credit score with a credit card:
- Increase the amount of your current credit card.
- Get a new credit card.
In the first case, make sure that the increase in the credit limit does not lead to an increase in spending on the card. Otherwise, this method to improve your credit will not work.
If you decide to use the second method, weigh the pros and cons before opening a new credit card. When you apply for a credit card, a bank checks the Hard Pull credit score to find out the degree of your reliability and responsibility. And each such Hard Pull-check significantly reduces the credit score. The more often it is held, the lower the credit score. It is recommended to do no more than 2-3 such checks per year.
Therefore, if this year you have planned several operations that require Hard Pull-checks (take a mortgage, buy a car on credit, etc.), then it is better to postpone increasing the loan by opening new credit cards.
4. Apply only for the loan you need
Every time you apply for a new loan, your report is subject to serious scrutiny. This type of request temporarily lowers your score. Applying just to find out if you’ll get approved or because you’ve received a pre-approval loan is not a good idea.
A series of inquiries may signal to creditors that you are taking on too much debt. According to a spokesman for TransUnion, the impact of tough checks lasts up to 12 months.
If you need to apply for a new loan, do your due diligence before applying to make sure you are a good candidate.
You should also refrain from applying for multiple credit cards within a short period of time or before taking on a large loan such as a mortgage.
When you’re taking out a mortgage, car loan, or personal loan, you can minimize difficult requests by comparing rates within a short period of time. Applications for the same type of loan within a certain time will only be displayed as one request. According to FICO, this interval can vary from 14 to 45 days.
5. Monitor credit reports
Accounting documents should be checked regularly and the correctness of the indicators should be monitored. No one, not even bank employees, is immune from mistakes. And just one small inaccuracy in the documents can lead to big problems in the future and negatively affect your credit score.
The three major national credit bureaus provide an opportunity to receive one report per year from each of them free of charge. And it doesn’t affect your credit score.
Read each report carefully. As a rule, a quarter of borrowers find at least one error in their document. Sometimes these are simple inaccuracies: a misspelled name, address, or accounts that belong to someone else with the same name. There are also more serious errors: invoices that are reported late or overdue; double listed debts; closed accounts that are listed as still open; accounts with the wrong balance or credit limit.
If you find incorrect or outdated data in the report, inform the relevant credit agency about it immediately. Once incorrect information is removed, your credit score will go up.
6. Control credit utilization ratio
If you are interested in how to improve your credit score fast, you’d better not spend too much credit funds and keep the level of their use low. As practice shows, the optimal ratio is 10% of the total amount of the credit limit. The people with the highest average FICO scores tend to have a ratio of 7%.
To assess your credit score, the coefficient that was at the time of the issuing bank’s report is used. FICO scoring systems do not separate those who pay in full each month from those who have a balance. There is another system – VantageScore, which makes a division between those who transfer their balance from month to month and those who pay in full.
7. Open old accounts
Many consumers seek to close old accounts and remove credit information. But it is not recommended to do this because these records also affect your credit. Especially if you made payments on time. Old, already closed loans improve the assessment of your solvency, as well as increase the confidence of credit institutions in you as a future client. Accounts with a long history and a list of payments made on time are the key to a high credit score.
What should you do if you made payments in old invoices? The main thing is not to worry, you should draw up a strategy that will allow you to avoid such mistakes in the near future. Of course, this will not remove your past due records, but it will help improve your rankings later on.
8. Pay off revolving debts
Wondering how to improve credit score fast? Try to pay more than the monthly minimum payment. Of course, if there is such an opportunity. A decrease in the revolving credit balance has a positive effect on the credit score because it helps to keep the level of credit utilization low. At the same time, it is better to focus on paying off credit cards and active large loans.
Issuers (legal entities issuing these cards) notify credit agencies about the balance on credit cards on a monthly basis, however, the date of notification may vary depending on the issuer. Therefore, it is better to call or chat online with your card issuer and find out when they report the balances to the credit agency.
The sooner you can pay off your monthly balance, the better. And to keep the balance low, you can also make several payments during the month. This will also make it easier to keep track of expenses.
Of course, paying off the entire balance will have the best impact on your credit. But if this is not possible, it is better to pay only a part than not to do it at all.
9. Consult with a specialist
We all need professional help in one way or another. And even if you study the topic thoroughly, a practitioner who has been doing this for more than one month or a year will always be able to tell more. For this reason, people often turn to specialists for help.
Credit score consultants are no exception. They are:
- provide support on all issues related to finances and credit score control;
- help set short and long term goals that can be managed;
- give recommendations on the right actions to get the best result;
- reveal great opportunities for the correct use of the credit system.
10. Be patient
You cannot improve your credit score overnight. The best way to achieve great results is to develop good long-term credit habits.
According to John Ulzheimer, a nationally recognized expert on credit reporting and credit scoring, there are two important factors that affect your ranking – the average age of the information and the oldest account in your report.
“You really need to have a couple of decades of credit history before you top out in the rating categories,” Ulzheimer advises. “It takes a very, very long time to improve a bad grade and very little time to ruin a good grade.”
Develop good habits like paying your debt on time, keeping your utilization rate low, and only applying for a loan when you need it. And over time, you’ll see how this reflects on your bill.
11. Keep track of your credit
When you review your own credit, you are making a “soft” request that does not affect your credit score in the same way that hard requests do.
Tracking fluctuations in your score every few months will help you understand how well you are managing your credit and if you need to make any adjustments. However, you should not base any financial decision solely on your credit score.
Of course, you should not expect to get an instant result. But systematic work in a team with a credit score specialist will significantly improve your credit over time. This means you can save thousands of dollars and give you more financial freedom.
How to check your credit report
You may obtain a free copy of the report from Annualcreditreport.com.
You will be able to receive one free report from each of the three major credit reference agencies (Experian, TransUnion and Equifax) per year.
Check your credit report for errors or they will lower your score. If you find errors, remove items from your credit report by challenging the information directly with the credit bureau. They are required to investigate any dispute and resolve it within a reasonable time. However, keep in mind that only incorrect information can be removed from your report.
Each credit report will have the information you need to improve your score.
You can also find a numeric or text code on your report, but no further information about what it represents. These are factor codes that represent items that could lower your score. VantageScore has a free ReasonCode.org website where you can enter the code from any credit report and get an explanation of what it means and tips on how to fix the problem.
If you are not sure if there are errors in your report, or if you are having trouble solving problems yourself, then seek the help of an expert.
We hope this article was useful for you and now you know the answer to the question “how to improve my credit score fast”! We wish you good luck!
Frequently Asked Questions
How long does it take to improve credit score?
It could take anywhere from one month to 10 years to improve your credit score, depending on your situation.
How long does it take to improve credit score 100 points?
For most people, increasing a credit score by 100 points in a month could happen within a few months.
How to improve credit score to buy a house?
To boost your credit score for a mortgage, get your free credit score, dispute any errors, make on-time payments, pay down debt, become an authorized user, consider a rapid rescore, never carry a credit card balance, improve your debt-to-income ratio, avoid closing open bank and credit accounts, don’t open new credit cards or loans.
How to improve credit score with credit card?
You can take 5 steps to build credit with a credit card: 1) pay on time every time, 2) keep your utilization low, 3) limit new credit applications, 4) use your card regularly, and 5) increase your credit limit.