Understand Your Credit, Raise Your Credit Score
So you landed a new job, making better money than your last gig. You’ve been working and saving for the last three months and decide you want to reward yourself with a new car. You go to the dealership and find that even though you have a good job, and can cover a monthly payment, you’re a less than desirable borrower to the bank. How can this be even though you make the money? It’s probably based on your credit score.
A credit score? What’s that?
A credit score is a number between 300 and 850 that depicts a consumer’s creditworthiness. This number is calculated based on an analysis of that person’s credit history. While a person’s credit is determined by many factors, let’s first define exactly what is credit? The term credit loosely refers to a contractual agreement between a borrower and a lender. How you carry out those agreements determines your score.
Credit scores are rated based on the number yours falls on. A credit score of 700 or above is considered good, 800 and above is considered excellent. Credit scores in the 600 range are considered fair, and below that is poor (avoid dropping below 600). So why should you worry about your credit score? It all just seems like made-up systems right? Well, though on some levels that may be true, credit checks often affect your ability to buy a car or home, receive loans, and even work certain jobs. Paying attention to your credit score is one of the most important things you can do in early adulthood.
Credit Reporting Bureaus
There are several different credit reporting bureaus but only a few are reputable. Credit Karma is an easy go-to for many people, however, Credit Karma does not give the most accurate view of one’s credit, nor are their scores used professionally. TransUnion and Experian are two of the most common credit reporting bureaus used by lenders. These services provide two free reports per year for those who want to monitor their credit.
How does a credit score affect you/ your buying power?
Credit score/history tells lenders whether or not you’re a risky borrower. We’ve all heard that a lower credit score can keep you from buying a home or car. Technically you still may be able to buy a car or home with a lower credit score, however, there will be penalties in the form of higher interest rates. Persons with a credit score below 700 are still able to apply for and receive home loans in some cases. However, a person with lower credit scores is subject to higher interest rates and even sometimes additional insurance rates, making the monthly expenses considerably higher for a person with a lower credit score.
Obviously, if you have a lower credit score, but a great job and can carry the fees, this may not be a problem for you. However, consider all the money you can save just by taking care of your credit on the front-end.
Things that affect into a person’s credit
What affects your credit and what makes it good or bad? Simply put, negative balances have negative effects on your credit. Paying any bill late that is reported to credit bureaus is one of the easiest ways people ruin their credit. Payments for car loans are among bills most commonly paid late. Repossessions and collections have the same effect on your credit score, and much like grades, your score is much harder to raise than to drop. Inquiries are another factor in one’s credit score. Too many hard inquiries in a short amount of time not only imply that your credit may not be ready for whatever purchase you’re about to make, but those inquiries can also count against your credit. Before having an entity run/check your credit, know your budget ahead of time. Map out how big of a loan you can afford to avoid too many hard inquiries.
How can I raise my credit score?
There is no quick fix to raising your credit. Raising your credit score is not something that’s done easily or overnight, which is why paying attention to it from an early age is so important. However, if you’re like many Americans, you probably didn’t grow up learning about the ins and outs of credit and how it works. Luckily, there are things you can do to turn around your credit score. It’s a long game, but it is possible. These are some things you can do to help fix your credit score.
Pay bills on time
This is one of the easiest ways to maintain a good credit score, and it costs no extra money. Paying your bills on time is great for your credit. It shows lenders you keep up your end of the deal by paying on time. Experiencing financial hardship? Apply for a payment extension, anything but getting a late payment on your credit.
Dispute your credit report.
Sometimes credit reports have errors, and this works in the favor of many borrowers. Go over your credit history with a fine-tooth comb. If anything appears incorrect reach out to the business. You can do this electronically or by snail mail. Some services will dispute your credit for you. Madison’s Accounting and Tax Services offers financial audits and credit repair service as well.
Keep your credit card balance low
Pay your credit card balance down and often. Making micropayments, or smaller more frequent payments is also a favored strategy for credit card payments.
Open a secured credit card
The thing about credit cards is you need a good credit score to attain one. It’s a catch-22. Before you’re eligible for actual credit apply for a secure credit card. A secure card is a prepaid card that allows you to use it as a credit card. Though the concept of prepaid may give pause, the good thing about a secure credit card is it is reported as a traditional credit card, allowing you to build your credit.
Request an increased credit limit.
To have your credit limit increased you have to urgently be in good standing with your credit card provider. That being said, raising your credit limit is beneficial because it shows you have more buying power. The same rules apply to your raised limit as far as only spent in 20% of your limit and paying it back immediately.
Hire a bookkeeper
This is one of the single best things you can do for your finances both personal and in business. Hire and accountant or bookkeeper to manager your finances, find inconsistencies and help with a fin canal plan to increase your credit score.
Note: Paying a collection does not remove it from your credit any faster. Collections remain on your credit for 7 years whether or not the debt is repaid.
Filing bankruptcy – avoid this at all costs.
Manage your accounts and avoid bankruptcy at all costs. There was once a time when ‘bankruptcy’ was ad taboo term that nobody liked to say out loud, much less admit that they had to file. However, as time changes and things progress, filing for bankruptcy is not the life sentence it used to be. In fact, for some people, filing bankruptcy is a cheat code to a new beginning. Yes, it does affect your credit, but if you have multiple counts in the collection and essentially more debt than income, it might be the right solution for you. That being said, it’s still smart to avoid bankruptcy if you can help it.
There are different types of bankruptcy. The most common types filed are Chapter 7 and Chapter 13. When chapter 7 Bankruptcy is filed, the party is no longer responsible for the owed debt. When Chapter 13 is filed, the arty is still responsible for a portion of the debt. Filing bankruptcy must be done through courts. Find a trusted bankruptcy lawyer and discuss your options.
It’s never too late to turn it around.
Your credit score is important. Monitor it like your monitor your monthly budget. Make a payment on time. Teach your kids about credit and smart spending habits. For more info or an audit of your credit and finance, schedule a consultation.
Thanks for reading. Madison’s Accounting and Tax Services is a financial service provider that specializes in helping beauty brands control and grows their financial power, while also passionately providing financial knowledge and resources to communities in local Midwest communities. If you enjoyed this blog please subscribe and share.
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