Looking to improve your credit score?
Find out how to repair, build, and boost your credit score in this guide to understanding and improving your credit.
Credit gets a bad rap because many people misuse it, but allowing your credit score to remain low can mean compromising your quality of life.
A good credit rating can help you save money, enjoy a nice home, and compete for better jobs.
Good credit may eventually help you secure the financing you need to build wealth through real estate investing and other business ventures.
In this guide, we help you understand everything you need to know to improve your credit, including:
- What Is A Credit Score?
- Why Do Credit Scores Matter?
- Understanding Credit Scores – How Are They Calculated?
- What Credit Score Should You Have?
- What Credit Score Do You Need To Qualify?
- How To Improve Your Money Management Skills
- 11 Best Ways To Improve Your Credit Score
Keep reading to understand credit scores, learn how credit scoring works, and how you can use it to your advantage.
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What Is A Credit Score?
A credit score is a three-digit number that helps companies evaluate how trustworthy you will be when borrowing money, renting a home, working as an employee, or even collaborating and partnering on projects.
There are many types of credit “scores” available to lenders, but the most common, used in over 90% of US lending decisions, is known as the FICO score.
Some lenders also review other histories, such as your income and length of time at your job, when making credit decisions.
Why Do Credit Scores Matter?
Credit scores are now used more than ever before, not only for approving credit applications but also as a way to check the background of potential employees.
Once, people could largely ignore their credit scores if they didn’t need to borrow money or get a credit card.
Today, though, you may have a hard time enjoying basic necessities without good credit.
Here are some of the reasons you need a good credit score:
Employers may check your credit scores before hiring you as a way of ensuring that you are responsible and reliable.
Choosing A Cell Phone Plan
Enrolling in most cell phone plans, such as Verizon and AT&T, requires you to pass a basic credit check.
Prepaid services provide alternatives for people who can’t get approved for a regular plan, but the prices can be higher and more limiting.
Renting an Apartment
Real estate agents and landlords usually check credit scores as part of the application process.
If your credit score is low, you may have to choose a home based on who will let you rent from them, instead of finding the home that’s best for your family.
Or, you may be required to put down a larger deposit before you move in.
Getting the Best Insurance Rates
While you don’t need good credit to purchase insurance, a good score often helps you get better rates, so you have more money left to spend and invest where you choose.
Earn Cash Back Every Time You Spend Money
When you have good credit, you can qualify for prime credit cards that allow you to earn cash back, rewards, and perks every time you spend money.
To find out which credit cards Minority Mindset recommends for the BEST perks, check out any one of these guides:
Saving a Fortune on Interest Rates
Whether it’s a mortgage, personal, or business loan, any type of loan you get charges interest.
How much interest you pay depends on your credit score, and people with excellent credit scores get the lowest rates.
Interest rates can cost you a small fortune if you have bad credit.
For example, if you take out a $300,000 mortgage loan*, and your bad credit score means you have to pay 4.5% interest instead of 3.5% interest, you’ll pay about $173 per month MORE than someone with good credit who got the 3.5% rate.
*Calculations based on a 30-year fixed mortgage
In the example above, a good credit rating would save you approximately $62,252 over the lifetime of your mortgage.
Now, imagine how much you could turn that $62,252 into by investing it over 30 years!
A good credit rating opens up opportunities you may not otherwise enjoy and saves you a significant amount of money throughout your lifetime.
Understanding Credit Scores – How Are They Calculated?
Understanding credit scores and how they are calculated is the first step to getting help with your credit score. It will better position you to take the necessary steps to improve your credit score, no matter how challenging it may seem at first. So let’s get started!
FICO credit scores are calculated using only information from credit reports.
Some lenders use specialized versions of the FICO score, such as the FICO Bankcard Score or the FICO Auto Score, but the most common is the standard FICO score.
FICO uses the following information to determine your credit score:
- Payment history is the most important aspect of your credit score, accounting for 35% of your total rating. Lenders want to know if you’ve paid your debt on time since it indicates how much risk they would be taking if they lend money to you.
- Amount owed accounts for 30% of your FICO score. It’s an essential part of your rating because it indicates how much of your available credit you’re using. If you’re using all the credit you have available; it tells lenders that your budget may be stretched to its limits.
- Length of credit history shows the age of your oldest and newest accounts, how long your accounts have been established, and how long it has been since you’ve used your accounts. The length of your credit history accounts for 15% of your FICO score.
- New credit accounts for 10% of your credit score and indicates whether you’ve recently opened several accounts within a short period. Opening too many new accounts is a red flag to lenders that tells them you may be high risk.
- Credit mix determines 10% of your FICO score and evaluates what combination of credit types you use, such as credit cards and specific types of loans and financing. If you successfully manage several types of credit over a period of time, it tells lenders that you are likely responsible when it comes to managing money.
FICO clearly states that the following factors do not affect your credit score:
- Age, race, color, religion, national origin, sex, or marital status.
- Receipt of public assistance
- Any employment history including salary, occupation, job title, and employer
- Credit card interest rates
- Child support or other family obligations
- Consumer-initiated credit inquiries (requests you make to check your own credit report)
- Promotional inquiries made by lenders, such as pre-approved credit offers
- Employer inquiries
- Any other information that is not proven to predict your credit performance
Please keep in mind that lenders may seek out additional information when checking your credit.
For example, although FICO doesn’t take your employment history into account, your lender might check up on your employment or other personal histories.
Understanding you credit score and what is and isn’t included in it is the first step toward tackling bad credit or no credit issues, so you can begin to improve your credit score.
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Understanding the Credit Score Chart – What is a Good Credit Score Rating?
FICO assigns credit scores ranging from 300 – 850, with higher numbers indicating better credit ratings.
A high credit score naturally means that you are good with making payments. Since it demonstrates to lenders that you are able to use credit in a responsible manner, you’re a worthy or low-risk candidate for extending credit. It encourages them to offer you the best credit card rates and benefits.
Since a low score indicates that you’re unable to make payments on time or even at all, naturally creditors are wary of extending credit to you. Given your likely history of missed payments, even if they do, it will be at a higher rate of interest to compensate for the high risk.
So, ultimately, in order to enjoy good credit rates and the best possible perks, you should aim to boost your FICO score to the high 700’s, so you can receive the best interest rates from lenders.
Understanding your Credit Scores – What Your FICO Credit Score Means
- 300 – 579 Very Poor: It’s unlikely that you’ll get approved for any type of credit. A very poor credit score makes you vulnerable to scams and traps such as payday loans and unreasonably-high interest rates that can keep you in debt, “underwater,” for years.
- 580 – 669 Fair: At this level, you’re considered a “subprime” borrower, and if you can get approved for credit through a legitimate lender, you’ll pay higher interest rates.
- 670 – 739 Good: A score in this range tells lenders that you’re very unlikely to fall too far behind on your accounts since only 8% of people in this range become seriously delinquent on payments.
- 740 – 799 Very Good: This credit score range is where you want to be to enjoy lower interest rates when borrowing. It also allows you to get better credit cards that offer cashback rewards and awesome travel perks.
- 800 – 850 Exceptional: This is your ultimate credit goal. Building an exceptional credit score means you get the lowest interest rates and can expect approval in most credit situations.
According to a recent report by Experian credit agency, only 21% of Americans have exceptional credit scores (800 – 850 FICO) and 25% have very good credit.
What Credit Score Do You Need To Qualify?
In this section, we show you what FICO score you need to qualify for various credit needs.
What Credit Score Do You Need To Buy A Home?
The minimum credit score you need to buy a home varies depending on which lender you use.
Most lenders require a credit score of at least 620 to get a mortgage loan, but to get a decent interest rate, you should aim for a minimum of 740.
FHA, VA, and USDA loans allow people without lower credit scores to get mortgage loans.
For example, FHA loans are a government program meant to assist first-time homebuyers.
FHA loans allow people to purchase homes with a lower downpayment than required by most lenders.
- A FICO credit score lower than 580 means you’ll need a minimum 10% downpayment for an FHA loan.
- A FICO credit score of 580 or above means you’ll need a minimum 3.5% downpayment for an FHA loan.
Caution: Minority Mindset thinkers understand that low down payments on home loans mean paying tens of thousands of dollars more in interest and private mortgage insurance over the lifetime of your loan.
Instead of rushing to buy a home before you’re ready, we recommend that you improve your credit score and save a down payment of at least 20% before buying.
What Credit Score Do You Need To Qualify For Loans And Credit Cards?
Credit score requirements vary from lender to lender, but in most cases, you need a “good” or “very good” credit score to get credit from a reputable lender.
Your FICO credit score needs to hit at least 700 to qualify for an auto loan with competitive interest rates from a traditional lender.
If your credit score is lower than 600, you may find a way to qualify through an auto dealership that provides special financing, but beware of high interest rates that may make your loan difficult to pay off.
Most lenders require a FICO score of 580 – 600 or higher to qualify for a personal loan.
To get a credit card with lower interest rates and perks such as cashback, rewards, and spending bonuses, you’ll need a very good FICO score of about 750 or more.
While you might be able to qualify for some credit cards, despite a poor credit rating, you’ll end up paying unreasonably-high interest rates on those types of cards — in some cases 10 – 20%.
High-interest credit cards are not a good choice for people with the Minority Mindset who want to build wealth because they often trap people in a never-ending cycle of debt.
Remember that just because you CAN find a way to qualify for credit doesn’t mean you should.
For example, credit cards can be an excellent way to earn cash rewards and perks while traveling, but should never be used to buy things you can’t already afford.
If you use credit cards the same way you use your debit card (to purchase things you already have the money to buy), they can provide many advantages. But, like any type of credit, it’s easy to get in over your head if you misuse them.
Understanding How Your Credit Score Can be Affected by Credit Card Use or Abuse
Improper or excessive use of credit cards to pay for items that consumers don’t have the money for is one of the most common ways to fall behind on debt and in turn affect their credit rating.
As they may not have the funds to pay their credit card bills on time, interest will start to accrue and build up over time, and it can be a vicious cycle to break out of.
How much will paying off credit card debt improve a score?
Be sure to keep your credit card balances under an acceptable level or better still, at less than 25% at all times if you want to take extra precautions. Also remember that not using your credit cards is not the solution to avoid late or missed bill payments.
On the contrary, adequate credit card usage is one of the simplest and most effective ways to improve your credit score. The percentage of the available credit you use will determine your credit utilization. And almost 33.33% of your credit score is positively impacted by adequate credit card usage.
How to Increase My Credit Card Limit?
Paying your credit card bills every monthly cycle before the due date is a good way to avoid late payments as well as an interest charge on the amount owed. In this way you can improve your credit score and over time be eligible for credit cards with a higher limit and lower interest rates. What’s more, you will also be able to enjoy tremendous perks like cashback offers or discounts if you maintain your credit score at a good level.
On the other hand, not paying your credit card bills on time will not only compound the interest but will also profoundly affect your credit rating. So, all things considered, it’s easy to improve credit with credit cards if you use them responsibly. In fact, it is the perfect solution to managing and improving your credit score.
How To Improve Your Money Management Skills
The first step toward improving your credit score is to take control of your finances. If you have bad credit, the first step toward improving it should be to review how you manage your finances.
If you’re in debt, begin with these Minority-Mindset recommended steps for managing your finances:
- Take time to think. When you’re broke or in debt, it’s natural to constantly have your defenses up because you’re often consumed with thinking about your next bill or payment.
Carve out a few minutes of free time each day to set aside your responsibilities and think about how the system works and how you might create new opportunities for wealth-building.
- Make a plan. Create a monthly budget that accounts for every single dollar that you earn. So, if your net income is $3000 a month, you should plan out how you’ll spend that money before it hits your bank account.
- Track your money. Record how you spend every single dollar you receive, so you can look back and make adjustments and improvements.
- Allocate your income. Spend no more than 75% of your net income, so that you have 25% left to save and invest.
- Find ways to earn extra cash. If you’re in debt, do everything you can to make some extra money and pay off your bills.
Cut expenses, downsize your living situation, sell some of your luxury items, or pick up a side hustle — whatever it takes! Earning extra cash will help you get out of debt and build security faster.
Improving your credit score takes time, but many people often begin to see a difference in just 5 – 6 months.
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11 Best Ways to Improve Your Credit Score
The following techniques will help take your credit score to the next level.
- Pay off all your debt, including credit cards and student loans.
- If you don’t have any credit cards, apply for a secured credit card such as Capital One or Discover, then pay off your entire balance every month.
- Use your credit card(s) like you would use a debit card: only buy what you already have the money to pay for. Then, pay off the full balance each month before the due date.
- Keep all your credit payments and bills current.
- Only apply for new credit accounts as needed, and don’t apply for too much credit at once or allow multiple inquiries.
- Don’t close any credit card accounts that aren’t costing you money because they can help boost your credit score.
- Check your credit reports for inaccuracies and work to get them removed.
- Occasionally request an increase on your credit card if you’ve been paying it on time.
- Take out a secured loan or ask your bank about credit-building tools such as passbook loans and low-risk credit cards.
- Check out a non-profit lending circle, such as Mission Asset Fund, for an affordable loan that will help build your credit rating.
- Use services such as Experian Boost and Rental Kharma to get credit for your on-time utility, cell phone, and rental payments.
In many cases, you will find that you can improve your credit score in 5 or 6 months by simply catching up on debt and paying your bills on time.
Hurry Up And Wait!
Improving your credit score isn’t complicated once you catch up on your bills, but it does take some patience.
Your payment history on loans and credit cards is the most influential factor in determining your credit score. The total amount of debt you owe also pays a key role in creating your rating.
Once you build good money management habits, it takes time for your credit score to rise. A new report for your credit generates only once a month, so don’t expect improvements to show overnight.
Although you may see some improvement after 5-6 months, part of your credit score is graded on your history over time.
Improving your credit score requires good money management skills and a lot of patience, but when you get there, you’ll probably agree that it was well worth the wait.
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