Credit card debt is stressful. This debt can carry high interest rates with the ability to eat your savings and budget. It has been a known factor and played a role towards putting people into bankruptcy.
Unfortunately, carrying a large balance of debt on your credit cards have become the norm and many are unaware what interest rate they’re being charged.
The average household carries $15,432 in credit card debt according to Nerdwallet’s 2017 American Household Credit Card Study. This figure was based on a survey estimate of 126 million U.S. households based on a 2017 Census Bureau data.
From this census, it was found that the average household with credit cards paid approximately $904 in interest ANNUALLY! (What could you have bought this year with $1,000?)
Of this debt, 41% of credit card purchases were used for “unnecessary purchases”. Have you purchased something this weekend that was unnecessary?
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Below I will outline 8 Steps to Increasing Your Credit Score:
#1 Understanding What Determines Your Credit Score
Is your credit score higher or lower than you expect? The goal for anyone is achieving a high credit score. A higher score means lower interest rates, if any at all.
It also helps you in getting new debt making the process so much easier.
This is a difficult task for many. It is extremely difficult if you don’t know what components makes up your credit score.
If you have a credit score of 655, for example, then according to the pie chart above, 65% of your score is determined by:
1. Payment History
2. Credit Utilization
Focusing on these two measures alone, will assist in raising your credit score.
The other measures are just as equally important, but let the numbers do the work for you. It is a strategy because ‘Time is Money’.
Other factors assisting to determine your score are:
Credit Age - the longer your credit history, the better
Types of Credit - diversify (mortgage, consumer, credit card)
Number of Inquiries - newer credit applications/inquiries hurt your score
#2 Review and Dispute Errors
Protect your personal information. It is sensitive and it is YOURS! Check your credit report on a regular basis. Check for any irregularities, errors, and check it for accuracy. Should you find any errors or items needing to be corrected, you should definitely contact the company with the dispute and address it directly. You can do this by phone or letter.
If contacting by mail, then ensure you send it via certified mail with return receipt.
If the matter has been corrected but still reflect negatively on your credit report, then contact the credit reporting agencies. Make sure you follow that order of sequence.
Be sure to keep and maintain copies of any disputes and records of such frivolous activity. According to the FTC, both the company and person are responsible for correcting the information. Follow the steps outlined in the link below to further take action: https://www.consumer.ftc.gov/articles/0151-disputing-errors-credit-reports
#3 Make Timely Payments
Paying your debt on time and paying off debt increases your Credit Utilization; one of the most common and best way for any consumer to raise his or her credit score is by paying down debt.
In terms of credit cards, the utilization rate is how often and how much money is being used. Basically it is are you charging up your available credit.
When your credit card is charged (you make a purchase),on an item for $500 with a credit limit of $1,000, that utilization has increased from 0% to 50%. The higher the number, the riskier one may be.
Lower utilizations are better for credit scores!
This ratio makes up 30 percent of your score, regardless of whether you plan to pay this off or not.
So be sure to make those payments on time and once those payments are made, avoid using your credit cards. Your goal should be seeing those credit balances consistently going down.
#4 Avoid Late Payments
When it comes to paying bills, the traditional manner used to be breaking out the checkbook, calculator, and bank statements. Then adding and subtracting from debits and credits to tally up a total to decide how to pay your bills.
The debtor would either go to the bank for payment, or write a check and then mail it out to the company requesting payment. These payments could take anywhere from 2-14 days to process. Today with the vast upgrade in technology, anyone can make a payment in seconds and with this technology, how is it that consumers are still bouncing checks?
Overdraft fees collected by banks in 2016 totaled over $30 billion--not thousands, not millions, but BILLIONS! That’s insane and just reflects how people are not managing their money appropriately.
When selecting to use autopay for bills, you can start making online payments to avoid missing a payment. A missed payment could be reflected on your credit score depending when the next payment is made. When making autopayments, you avoid receiving late charges that companies love to tack on. These fees, similar to overdraft charges, can range from $20-$50 in some cases. Also at risk, is your interest rate. Some companies will increase your rates for missed payments.
Autopay can save you time. With everyone shouting they have no time, now they have no excuse. It’s faster in so many aspects from check writing, calculating, driving to the bank or to the post office, etc. Pay it online and you’re done.
#5 Do Not Close Accounts
You must avoid closing accounts, if possible. I am not referring to paying off loans but rather calling credit card companies to request closing an account while still owing a balance.
Closing credit accounts will not disappear on your credit report but rather reflect “CLOSED” or something along this verbiage.
I bring this up because if you have credit card balances that are past due, credit card companies have the option to close the account without your approval. This will lower your score and you must still pay the balance.
It takes away your credit utilization which is needed!
For many companies, once the account is closed and still reflects a balance, these accounts cannot be reopened.
#6 Avoid Opening New Accounts
With the rapid pace of consumer advertising and marketing for credit, you are offered low rates on credit cards, mortgages, and auto loans every time you turn on the TV, check email or driving on a highway only to see billboards.
It’s so frequent and accessible, it’s easy to forget the potential impacts of your credit rating. Of course, it always feels rewarding to be approved.
It is not uncommon to see consumers’ credit FICO score drop temporarily when one has been approved for new credit. If you paid attention to the pie chart above, you remember “inquiries”.
Having recent inquiries up to two years on your credit report may potentially drop your credit score. Therefore, avoid opening too many lines of credit or applying for new cards and applications.
#7 Diversify Your Credit
FICO determines your score based on a blended mix of debt. It looks for accounts you have from credit cards, retail accounts, installment loans, financial services accounts, and mortgage loans.
While you may not need each one, having a blended mix and reflecting responsible on-time payments are crucial and key to having a better credit score. When I was establishing my credit score after my 18th birthday, I could never get my score any higher than 702. I struggled with getting a higher score for many years.
As I began to understand credit mix, I realized that a mortgage balance was missing. Several years later, I bought a lovely home and within the following month, my score jumped to 780.
Now I am not recommending you rush out to get a mortgage. It reflects your experience with revolving and installment debt--diversification.
If you have only one credit card, FICO will determine your lack of diversification.
I am not recommending you go out get loans and more credit cards to diversify your portfolio but this is for your education on the impacts of credit and your credit score.
#8 Seek 0% APR Balance Transfers
Typically in the fall season, you will start to see more credit card marketing and advertisements offering 0% interest. This usually occurs as we approach the start of the new year.
This begs to question, “Should I transfer my balance?”. It’s a great question because transferring balances can save you money in interest payments alone.
If you are working towards paying off a credit card, then it is something to definitely explore. You will want to ensure that no additional fees or balance transfers are included in this introductory offer. These are sometimes considered “Hidden Fees”.
Some credit cards carry extremely high interest rates. If you own a card and carry such a burden, then it is ideal to explore this avenue.
Even if the hidden fees are nominal, you may still come out ahead by moving the balance to the 0% credit card as long as the interest rate on the newer card is lower once that introductory period is over.
Everyone’s situation is uniquely different. You will want to review your current credit and debt situation regularly. Understanding what impacts your credit score, is the first step in learning how to increase it.
Once you understand the factors and the roles that determine your score, you must make time to review your credit report and dispute any errors. If you have no errors, ensure you are making timely payments and not making any late payments.
You can receive a FREE credit report copy at Credit Sesame but it is offered through my affiliate program because I promote this company often. Check here to perform your due diligence in making sure you have no errors or disputes.