**Editor’s Note: FairShake is not an attorney, law firm, or financial advisor. Our editorial team does thorough research to the best of our ability to ensure this content is accurate, but it does not replace professional financial or legal advice.**
A credit score is a number between 300 and 850. It determines how reliable you are with money and how responsible you are with credit. The higher your credit score, the more responsible you are. Companies (banks, rental companies, etc.) may run a credit report for you to determine your credit score before agreeing to do business with you.
A good credit score is considered anything 700 or higher. An excellent score is between 800 and 850 but you can still get low interest rates on any loans if you have a score above 700.
If you look at your credit and you see that the number is below 700, there are many reasons why this might happen.
There are many things that can hurt your credit. any new credit checks or inquiries will hurt your credit. This doesn’t hurt it significantly, but it does still bring it down a few points here and there. So anytime someone checks into your credit history and makes an inquiry, it drops your score. This tends to go away within a few weeks but, if you apply for an Amazon business credit card in the same week that you submit for personal loan at your local bank, it will drop your score for the remainder of that month. You can, however, get one free report annually from annualcreditreport.com.
Failing to make on-time payments hurt your credit significantly. Your payment history is the biggest part of your score so if you have a history fraught with untimely payments, or a whole section of your history where you didn’t pay off a debt at all and it went to collections or you filed for bankruptcy, these will hurt your score the most. Things like collections, wage garnishments, or filing for bankruptcy will remain on your credit score between 7 years and 10 years and they will hurt you the most.
Behind this representing 30% of your score is the amount of debt you have in relation to the amount of credit you have. Basically, when people look at your credit score they want to see that you are financially responsible enough that they can loan you a lot of money but you don’t actually use all that money. Just because you have a credit card with a $5,000 limit doesn’t mean you should max out your credit card. In fact, you should never use more than 15% of your available credit if possible.
Too many people believe that any on time payment they make is going to help their credit score, but that’s simply not true. When you pay your cell phone bill, your regular household bills, or your rent, none of that applies to your credit score. When you make timely health insurance payments, that still doesn’t help you. So what does?
If you want to raise your credit score, or simply increase your score so that you can apply for additional lines of credit or higher credit limits, there are many things you can do.
There are five categories of data that come together to determine your credit score. Your payment history accounts for 35% so the longer you have a good payment history, the higher your credit score will be. This is something you can’t find a workaround for, but just have to do long-term. If you set up a plan to target other areas of your credit report, your payment history will come with time.
Beyond that, the total amount of debt that you have is the next biggest factor to increase your credit. Your credit card should actually be used for things like regular payments to your cell phone, getting groceries, or buying gas, things that you then pay off at the end of each month with your paycheck. Doing this instead of relying on your credit card as some sort of emergency money or spending it extraneous will help build your credit the most. When you use your credit card to pay for regular monthly items and then pay it down at the end of each month entirely, this shows things like:
If you want to raise your credit score in 30 days, the first thing you want to do is pay off as much of your debt as you can. Remember that the Amount owed section qualifies for 30% of your total credit score. If you can significantly reduce your debt to credit ratio, this will increase your score the fastest.
Concurrently, even though it may hurt your credit report to do so, verifying your full credit report and looking for any errors can help you in the long term. Any credit you have paid off that has yet to be removed from your credit report could be hurting you and Reporting the error to the appropriate organizations can have it removed from your record and improve your score in 30 days.
Another tip is to get reduced APR on the existing credit card you have. Most people get a mailbox full of junk mail from other companies telling them they have qualified for another credit card. Hang on to that piece of mail even though you don’t need to get the other credit card, and call your existing company to see if they will give you a lower interest rate. Let them know that you would like a 15% interest rate instead of the 20% interest rate you have right now because this other company is offering you a 15% interest rate. Even though you might not get that full reduction, even dropping your APR by a few percentage points can reduce your total amount owed, and help boost your credit score.
For example: You have $5,000 in credit card debt. Your interest rate right now is 18%. Your minimum monthly payment is $100 every month. If you make the minimum payment at that interest rate it will take you 8 years to pay off the $5,000. If you can contact your company and drop your interest rate by just 3%, so that your interest rate is now 15%, paying the minimum amount would only take you 6 1/2 years to pay off your debt entirely.
You can raise your credit score by 100 points if you improve the amount of credit utilization you have, your payment history, how long you have had your existing lines of credit, and your credit mix in that order.
The most important thing is to improve your amount owed. If you expect something like a bonus, or you have extra money from your paycheck, or anything in savings, you can raise your credit score by 100 points when you allocate that money toward paying down something like your credit card debt or your car loan.
Setting up automatic payments for higher than the minimum payment amount will go a long way toward reducing your amounts owed and improving your credit score. Every week you can see this figure improve as you make additional payments and at the end of every month you can see the significant improvements you have achieved.
The longer you have a good history of on-time payments above the minimum payment amount, the higher your score will be. If you can set aside 3 months, 6 months or 12 months for specific goals you will see your credit score increase by 100 points after making timely payments.
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