If you’re trying to save some money you’ve probably examined all of your household expenses trying to find a place to cut back. But you may have overlooked the one thing that could save you the most, your credit score.
Your credit score will determine many things; it’s used to approve financing for a mortgage, a credit card, a car loan and many other things. A good credit score can lower the insurance premiums that you pay on your home and automobile.
Even whether or not a potential employer hires you or a landlord accepts your application, can all be decided based on that number.
Improvements in your credit score take time; it could take one to two months at the minimum to see any change at all.
To be able to increase your score, you have to understand how a credit score works. The FICO credit score is used in lending decisions more than any other. To qualify for the lowest interest rates and preferred loan terms, you need to have a score of 750 to 850. A good score is 700 to 749; you will likely find approval for the job or apartment that you applied for with a score in this range. A fair score is 650 to 699, with this kind of score you will pay higher interest rates and possibly be rejected for loans.
Visit annualcreditreport.com or call 877.322.8228 to order your free annual credit report. Experian, Transunion, and Equifax, the three major credit report agencies, must provide you a free report upon request also. You can get one free copy from each agency per year.
Some of the so-called “free” credit report websites charge you for the report. Some 79% of credit reports contain errors, so it’s important to check your report for mistakes, and if you find an error you can dispute it online with the bureau that’s at fault.
What can you do to fix your credit if you weren’t able to pay your bills for a while?
Once you have been turned over to a collection agency, it becomes a little more challenging to increase your credit score. Before you do anything, learn your rights as spelled out in The Fair Debt Collection Practices Act.
Contact your creditors and ask them to erase debt from any account that was turned over to a collection agency. Tell them that you will pay the balance in full if they give you a written agreement stating that they will mark your account “paid as agreed” or completely remove it.
Pay your medical bills last. Not paying them doesn’t hurt your credit as much as not paying regular bills.
Pay your most recent collection accounts first. These accounts affect your credit more than old ones. Over time the damage to your score will diminish.
Related: 4 Steps To Becoming Debt Free
What if you are trying to establish credit?
Apply for a credit card. If you pay on time and don’t charge excessively a credit card or two will improve your credit score.
If you haven’t established any credit yet, you may have trouble getting approved for a traditional card in which case you could apply for a secured card.
Secured cards
A secured card requires you to deposit money with the card issuer, this is used as collateral to make sure you pay your bill. The deposit is refundable if you handle your card responsibly. Here are some of the most recommended secured cards:
Capital One® Secured MasterCard®
Capital one is a good choice for your first card. No annual fee for this card and the credit limit is $200. The deposit varies between $49 and $200, depending on your credit.
Discover it® Secured Card
Looking for a card with rewards and one that you can transfer to a regular card; this is the card for you. The annual fee for this card is $0. After a year you are automatically evaluated to see if you qualify for an unsecured card. It also gives you access to your FICO score. You must have a checking or savings account to set up your initial deposit.
OpenSky® Secured Visa® Credit Card
This card has an annual fee of $35. Your deposit is equal to your credit limit up to $3000. This card is best if you have bad credit or no checking account.
Another way to establish credit when you’re first starting out is to have a friend or relative make you an authorized user on their account. The primary account holder is responsible for the bill, not the authorized user. As long as the account holder has good credit, this will improve your credit score by being added to the account. The primary cardholder may choose to withhold the card to avoid the risk of having to pay the additional debt.
What If You Want To Improve Your Credit?
Don’t use all of the available credit on your card. For the best results try not to exceed 30% of your available limit. That means if you have a credit card with a $1,000 limit, you can’t charge more than $300 if you want to improve your credit score. Maxing out your cards will drop your credit score.
To keep your available credit from going down, you need to keep all of your credit cards open. Keep them all active; you could use one occasionally for something that you were going to purchase anyway, such as groceries.
Make sure you make your payments on time. 35% of your FICO score is whether or not you pay your bills and pay them on time. If you’re too busy to keep track of your due dates, try scheduling your payments to pay automatically.
Be Careful With Your Credit Cards
Remember that credit card debt can kill your financial goals, so avoid it at all costs. Only use credit cards to build credit or just pay cash if you can’t control your spending.
