How to Improve Your Credit Score

Your credit refers to your ability to borrow money and pay it back as efficiently as possible. Healthy financial habits can help you establish a high credit score, which can lead to greater success when requesting a loan for a home.

Your credit is a comprehensive rating of how much money you have borrowed (either by using your credit card or by borrowing loans), who you borrowed the money from, how quickly and completely you have paid off your debts, and how you are handling current debts, if you have any. With all of those factors in mind, creditors can accurately judge your "creditworthiness," or how timely you are when paying off your debts. A credit score, also called FICO score—named after the software credit scores are produced from—is a way for creditors to consider whether to approve an application for a mortgage, credit card, or other loan.

There are a few different types of credit reports you can order to check the status of your credit and credit score, but be warned—some inquiries/orders can drop your FICO score by a few points, which we'll explain later.

You may be familiar with a consumer credit report. This type of credit report contains your total history of credit information, including your score, accounts, inquiries, personal information, and potentially negative items that are impacting your overall credit. Under Federal law, you are entitled to receive a copy of your consumer credit report from each credit reporting company (Experian, TransUnion, and Equifax) every 12 months at no cost to you.

Your consumer credit report shows four main categories of information: identifying information, credit information, public record information, and inquiries.

• Your identifying information includes your name, address, Social Security number, date of birth, current and previous employers, and so on.

• Your credit information relays specific details about your credit card accounts and loans. In this section, your report will display the date an account was opened, the credit limit or loan amount, the loan balance, and the monthly payment amount. Your payment history is also shown, including late or missed payments and collection accounts and repossessions.

• Information listed in the public record section includes any bankruptcies, foreclosures, tax liens, and monetary court judgments you may have.

• The inquiries section briefs you on the names of any company that has received a copy of your credit report, as well as the frequency in which you have applied for a new account within the past two years.

Some of the information listed above has a direct impact on your FICO score. Your score likely falls between 300-850 points, and largely has to do with your payment history, your outstanding debt, the length of your credit history, the types of credit you use, and any new credit.

• Your payment history lets lenders know whether you are in the habit of paying your bills on time. The longer you wait to pay a credit card bill, for example, the greater the negative impact on your FICO score.

• Your outstanding debt indicates how much money you owe on each account you have open and active. If you owe a large amount of money you owe across many accounts, you may be decreasing your FICO score.

• The length of your credit history refers to how well established your credit history is. A longer credit history that shows quick payments and little to no debt is preferred and will raise your FICO score.

• The types of credit you use shows the combination of credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans you have on your credit report. It details how many accounts you have, and what type of account they are.

• If you are taking on new credit accounts, lenders may come to the conclusion that you are taking on more debt. Opening many accounts—especially in a short amount of time—can decrease your FICO score and lead to missed payments and unmet obligations.

With all of this in mind, how can you improve your credit?

First, take a close look at your consumer credit report. Sometimes there are errors or omissions that can harm your creditworthiness, like an unpaid hospital bill for services that were paid by your insurance company. These errors are easy to correct and are a quick boost to your overall credit. Here's how you can correct an error on your credit report.

Before you embark on your credit repair journey, set some realistic goals to hold yourself accountable and celebrate the small wins that add up to major successes. Keep in mind that increasing your credit score takes time, and there are no true "quick" fixes. Establishing a series of goals can also help you create a spending plan to help track your income and expenses. Here are some additional strategies that can help you reach your goals:

• Reduce outstanding debt. Large amounts of outstanding debt, like high balances on credit cards, can negatively affect your score. Pay off your debts completely—no matter how long it takes—to keep your credit score from dropping further.

• Pay your bills on time. If missed payments are delinquent or get sent to collections, your credit score can drop. If you have missed payments that you owe, try your best to pay them fully to get back on track. The longer you maintain timely payments, the steadier your credit score increases.

• Don't apply for unnecessary credit accounts. It's best to stick with the accounts you actively use and are able to pay off than to consistently apply for and open new accounts. Low account ages have a negative affect on your credit score and look untrustworthy to lenders.

• If you do open new credit accounts, use them wisely. If you are confident that you will be able to pay off debts in a timely manner over a long period of time, you can raise your credit score. However, if you already have credit accounts that you owe debts on, focus on paying those off first.

As always, NeighborWorks® Toledo Region is here to help. At any time, you can connect with a Financial Coach in our Financial Opportunity Center© to discuss strategies and tactics that work best for you.