A credit score is a three-digit number that helps financial companies assess the risk of providing a loan. Equifax, Experian, and TransUnion, the three major credit agencies, gather the information to calculate credit scores. 

Your score decides whether you are eligible for a loan, the interest rate, and the term. Additionally, your credit score is also taken into consideration by insurance providers, potential employers, and landlords. 

While the average credit score in the US is 710, it doesn’t mean everyone has a good credit score. You can live with a low credit score, but it makes life challenging. It can hold you back from buying a new car, renting a new apartment, or buying a new house. 

However, you can fix your credit score with a few simple steps. You can open an account that reports to the credit bureaus, keep a revolving credit low, or pay bills and installments on time.

Why do you need a good credit score?

A good credit score plays a crucial role in managing your credit and debt and applying for mortgages. Keeping your credit score high proves your creditworthiness and how responsible you are with your credit. 

What are the benefits of a good credit score? Better loan rates and simpler approval processes are the answers. Most people will save hundreds of thousands of dollars with a good credit score. A person with excellent credit is eligible for lower interest rates on mortgages, car loans, and everything that involves financing.

Better credit scores show that person is a lower-risk borrower. Financial institutions compete to provide better rates, fees, and benefits. On the other hand, those with bad credit are higher-risk borrowers. They can make lenders get away with charging high annual percentage rates (APRs).

How your credit score is calculated?

There are a few components with their unique importance that help in calculating the credit score.

1. Payment history- This category helps to assess your previous payment records and the consistency of repayments. This history also includes your bankruptcies, delinquency, and missed payments. Payment history can impact your credit score and boost with on-time repayments. 

2. The amount owed- The next essential component is the amount you owe in contrast to the available credit. A person who utilizes the amount above the credit available can be a risky borrower. Lenders consider the credit utilization ratio crucial and should be below 30%.

3. Length of credit history- You must keep your credit accounts active and in good standing for a long time. Someone with a good payment history of 20 years is a safer bet than someone who has only been on time for two years.

4. New credit- When you apply for new credit frequently, it shows you have some sort of financial pressure. Applying for a new loan can lower your credit score due to a hard pull. You must evaluate whether the loan is worth a drop in your credit score. 

5. Credit mix- Lenders often prefer a healthy credit mix which shows that you can efficiently manage different credits. Revolving credits include credit cards, retail cards, gas station cards, lines of credit, and installments that should be consistent and regular.

It is crucial to understand that your credit score only reflects the information included in your credit report by the credit bureaus. Your lender may require the information your credit report doesn’t have, like your age, income, and length of employment.

How to fix your credit score?

Some situation-specific steps can improve your credit score depending on your debts and finances. However, there are some general guidelines to follow to fix your credit. 

1. Monitor your credit report- Credit monitoring can help you prevent identity theft. This happens when someone misuses your personal information without your consent. Checking credit reports helps identify various purchasing patterns.

It can help you check any negative information on your credit report that isn’t accurate. Checking your credit report requires a soft credit check, which doesn’t impact your credit score. You must check it once a month. 

2. Dispute errors in your credit report- Sometimes inaccurate information is reported on your credit report, which can impact your credit score. Ensure that you keep an eye on your report and dispute if you find any negative remarks. 

According to the Federal Trade Commission (FTC), 5% of people found errors on their credit reports, making it hard to apply for loans. While checking your credit report is a good step, it is important to spot errors. If you find one, ensure you raise a dispute and remove the error. 

3. Pay bills on time- Monthly payments make up 35% of your credit score. To improve your credit score, you need to make on-time monthly payments. Paying bills every month is the best way to boost your credit. It may seem challenging to remember every time to pay on time. However, autopay can help to simplify the issue.

4. Keep your credit utilization low- You can measure your credit utilization ratio by comparing your credit card usage with the overall limit of your credit card. Usually, the credit utilization ratio should be less than 30% and more than 0. 

For example, you have two cards with separate credit limits of $2,000 each and $500 in unpaid balances on one of them. 12.5% would be your credit usage rate. Divide the total amount of your debt ($500) by the $4000 sum of your credit limits.

5. Keep your old credit card open- You may want to close the old credit accounts after paying them off, but don’t be so quick. Keeping your old account open improves your credit score. It makes up for 15% of your credit score.

6. Minimize the use of revolving credit- Your lender runs a hard credit check which can impact your credit score every time you apply for credit. It is better to apply for revolving credit in case of emergency.

How does a credit repair company help to fix your credit score?

Credit repair businesses work by checking and eliminating inaccurate or negative information from your credit report. If you decide to hire a credit repair company rather than fixing your credit yourself, try to find a nonprofit organization. It is crucial to understand that as per the credit repair organization act (CROA), a company must explain the following:

1. Your legal rights in a written contract and the services the company will provide.

2. That you have three days to cancel without any charge.

3. The time that the company takes to get results for you.

4. The charges you need to pay for credit repair solutions.

5. Any promises the company makes.

In addition, there are some reputable credit repair solution providers like Cool Credit, that you can try.

Moving forward

It’s good to fix and raise your credit score, especially when you plan to get bigger loans or buy new assets. It may take weeks or months to notice the difference when you start improving your score.