Is Your Credit Score Too Low? Here’s How to Improve It In 7 Steps

What is credit history in the US? What is a credit score? How can you improve it and why is it needed? We figured it out. In our article, 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.

A little more about credit history

Credit history is an indicator of your financial strength. It plays an important role in the life of every resident of the United States. Be prepared for the fact that your credit history will definitely be checked when renting a house, sometimes even when applying for a job. Do you want to take out insurance, buy household appliances or get a car loan? The same picture: first of all, the lender will check your financial integrity.

Americans actively use credit cards not only for expensive purchases but also for daily expenses. Therefore, the proof of the financial stability of American residents is their active credit history.

Why do you need a credit history?

A credit history in the US 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.

How to build credit from scratch

Credit history is started with the receipt of the first credit card. But 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. This is a card on which you put a certain amount (from $200) and use it as a credit card: spend money and regularly replenish your account up to the initial amount. In this way, you will demonstrate your ability to manage funds. And in six months or a year you will be able to get a standard credit card from the bank.
• Credit card from a large department store or gas station. This is a good way to start a credit history. Retail chains like JC Penney, Target, or Macy’s issue prepaid and regular credit cards. The main conditions are the presence of a social security number and a stable source of income. Of course, this card can only be used in the store that issued it. But these actions are also taken into account in the credit history.
• Car loan. Getting a car loan is another effective way to prove that you are a trustworthy person. Many 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. These are short-term, small-dollar loans (usually up to $1,000) that are typically issued for up to 31 days. Payday loans could help you build credit if you pay them off as agreed. This is because managing loans properly over time proves you are a reliable borrower.

Credit history is also positively affected by the presence of long-term accounts: settlement and savings. With their help, the bank can characterize the client as a future borrower. Therefore, having a personal account can also help you build credit.

What is a “credit score” and why is it important?

A credit score is an assessment of your solvency and ability to handle money. The higher it is, the more benefits you have. A high score significantly reduces the risk of refusal when applying for a new loan and allows you to get a loan on more favorable terms: with a low interest rate. An applicant’s credit score is generated from the data in the credit report, so your credit history directly affects the score.

How is a credit score formed?

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 on myfico.com.

FICO score scales are also divided by color. If the score is:

• in the red zone (300 – 639 points) – the applicant is almost 100% likely to be denied a loan;
• in the orange zone (640 – 699) – there are more chances to get approval, but subject to the guarantor and, most likely, the lender will reduce the requested amount;
• in the yellow zone (700 – 749) – the borrower can get a loan on good terms;
• in the green zone (750 – 850) – the client can get very favorable loan conditions and choose the bank and type of loan, as well as get bonuses, such as insurance or loan rate variability.

7 steps to improve your credit score

Improving your credit score is an important step that opens up new opportunities for a US resident. Let’s get acquainted with the main ways to build a good financial reputation:

1. Timely payment of bills

Payment history is one of the most important factors in the formation of a FICO credit score. Making payments on time demonstrates your responsibility to creditors. Punctuality in paying bills and compliance with obligations to the bank are important indicators of your reliability, which are conducive to cooperation with you.

What if there is already a delay in payment? Information about overdue payments is stored in the credit history for up to seven years, and a bankruptcy application for as much as ten. Therefore, it will be better for your credit history if you try to pay off all the debts instead of declaring yourself bankrupt. And of course, if you want to keep your credit score high, allow no more delinquencies.

2. Control of credit reports

Regularly check the reporting documents and monitor the correctness of the indicators. After all, no one is immune from mistakes, even bank employees. One small inaccuracy in the future can lead to big problems and subsequently negatively affect your credit score.

Three national credit bureaus Equifax, Experian, TransUnion provide an opportunity to receive one report a year from each of them free of charge. You can do this on the Annual Credit Report official website or by calling 1-877-322-8228. Check your financial statements annually to avoid potential errors.

3. Payday loans

One of the most popular options for fixing your credit history is to apply for a payday loan from a microfinance institution. Here you can get a loan for a short period – usually up to 31 days. Timely payment of loans will help improve a credit score. But this method has a drawback – payday loans come with higher interest rates than traditional bank loans.

Important: Before you take out a payday loan, be sure to evaluate your financial capabilities. This is necessary so as not to aggravate the situation and not get into a debt trap.

That is why it is recommended to draw up a clear action plan. For this, follow the proposed instructions:

• Select a reliable microfinance institution. Compare several lenders, if possible. Examine all the information received: the lender’s experience, availability of physical branches, etc. Read the contract carefully, pay attention to the terms of the loan and the interest rate. Do not agree to give away property in case of non-payment of the debt. Read reviews from other customers.
• Submit an application for a loan. To do this, you need to visit the office of a financial institution. You will need to take a government-issued ID with you, as well as another document that will confirm the identity of the borrower, such as a driver’s license.

There is another way to apply for a payday loan. This is an online application. It is usually processed immediately or within a few minutes. If the application is approved, the money will be transferred to the borrower’s bank account as soon as the same day or the following day. Moreover, the system will select the best lender for your unique needs from an extensive network of legitimate financial institutions.Knowing a few tricks, you can fix your credit history with minimal expenses. The main thing is to repay the loan on time.

4. Control of credit utilization rate

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 credit limit amount. The people with the highest average FICO scores in most have a coefficient of 7%.

To assess your credit score, they use a coefficient that was at the time of the issuing bank’s report. 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.

5. 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 the credit score, especially if payments were timely and complete. Old closed loans improve your solvency assessment and 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 can you do if you missed payments? The main thing is not to worry, it is better to draw up a strategy that will allow you to avoid such mistakes in the near future. This will not remove your records of late payments but it will help improve your rankings in the future.

6. Minimum requests – maximum benefit

Do not submit to many loan applications. When you contact a lender, they look at your credit report. The more applications you make in a short time, the higher the chance that the lender will take this as a signal of your possible financial difficulties.

When you are applying for a new loan, it temporarily lowers your credit score, so it’s best to apply only when necessary – a mortgage, a car loan, a student loan, and the like. If you want to improve your credit score, it’s best to refrain from applying for a new loan or even a new credit card for a while. After all, the bank also carefully checks your reliability when issuing a credit card.

7. Experian Boost

Experian Boost is a free service from Experian – a credit bureau. The program links your utility bills, Internet, mobile communications with your credit score. This allows you to increase the score by an average of as much as 10 points. This is an excellent option for those who do not yet have a loan or are just starting to build their credit history.

Move towards your goal!

Unfortunately, most of the above steps are unlikely to boost your credit score instantly. Therefore, do not waste time in vain, be patient and start acting. What step on the way to a good credit score will you take first?