Improving their credit score is a goal for many Texans, but it can be daunting if you don’t know where to start. Whether you are establishing credit for the first time, recovering from questionable financial decision-making, or have had to take on more debt than you can handle, there are ways to put yourself on the right path. While everybody’s situation is different, you want to have the best credit score possible to keep your financial options open and keep money in your pocket.
Why Do You Need a Good Credit Score?
A credit score not only signals your risk level to potential lenders; it can be seen as an overall indicator of financial health. For that reason, having a good credit score can give you the peace of mind that you’re making wise and thoughtful financial decisions. However, there are other, more concrete reasons to want to improve your credit score, and quickly.
Lower Interest Rates
Lenders compete for stable and responsible borrowers by offering lower interest rates. Acquiring a low interest rate pays big dividends on the back end, especially for major purchases. While a 1% decrease might not seem like a lot, if that reduction is on a $400,000 home, the savings would be over $90,000 across the life of the loan. This can help you afford the home you want in the area you desire, whether that be Houston, Austin, or something more rural. To see how much these lower interest rates can save, Moody Bank offers easy-to-use financial calculators.
Higher Loan Amounts
Whether it be to buy a home, start a business, or purchase a vehicle, you’ll want to have the borrowing power that you need. Lenders will frequently cap the amount they are willing to lend to those with fair, poor, or no credit scores. A good credit score will ensure that all your borrowing options are open to you.
Higher Credit Limits and Better Rewards
As your credit score improves, you may find yourself “pre-approved” for a variety of credit cards. Some of these cards come with benefits such as cash back, travel rewards, dining points, and other perks. However, these are normally reserved for borrowers with good to excellent credit. Additionally, you will also qualify for higher credit limits. This can lead to an even further increase in your credit score, as ample credit is seen as a positive sign by credit bureaus and lenders.
How is My Credit Score Determined?
Credit bureaus use two main formulas to determine your credit score: FICO and VantageScore. Essentially, both formulas use the same categories to calculate your score, though the categories are weighted differently. FICO is much more common, and therefore more likely to be the number your lender will look for. Here’s what the FICO formula looks for, and how much effect it has on your score:
- Payment History (35%): The most important category, your payment history simply indicates if you’ve paid past credit accounts on time. In fact, payment history is so important to your credit score that [one expert] says “about 98% of “FICO High Achievers” have zero missed payments. . . .and for the small 2% who do, the missed payment happened, on average, approximately four years ago.”
- Amounts Owed (30%): This category looks at the amount of credit you’re using compared to your available credit. If you’re using too much, you may be at risk of overextending yourself.
- Length of Credit History (15%): This looks at the age of your accounts, including your oldest, newest, and the average length.
- Credit Mix (10%): FICO will see if you have a variety of loan types—for example, a mix of credit card, installments, mortgage, student loans, etc.
- New Credit (10%): While opening new lines of credit can help your score, opening too many too fast can indicate risky financial behavior.
What Do the Numbers Mean?
Once a credit bureau uses FICO to determine your credit score, it will fall into one of the following ranges:
- 800 – 850 Excellent: Falling in this range means you are a low-risk and responsible borrower, and will qualify for the best interest rates.
- 740 – 799 Very Good: Borrowers in this range pay most of their bills on time and tend to have credit balances on the lower side.
- 670 – 739 Good: While the average American credit score falls in this range, it may be hard for borrowers to get some lines of credit. Additionally, you will not qualify for the best interest rates.
- 580 – 669 Fair: You may have imperfect credit in this range, and likely a history of late payments. However, you can still qualify for credit, which can be used to rebuild your score. Just don’t expect your interest rates to be very low.
- 300 – 579 Poor: If you find yourself in this range, it will be difficult to obtain new credit. However, credit professionals like those at Moody Bank can help with credit repair services and get you back on the right track.
How Can I Improve My Credit Score?
If you have credit score below 580, or if you want to position yourself for a better interest rate on a mortgage, HELOC, or car loan, then you’ll want to take some steps to improve your credit score. Below are some ways to quickly see a rise in your score.
Lower Your Credit Utilization
Credit utilization refers to the ratio of revolving credit you are using to your total credit limit. You want your credit utilization under 30%, but for maximum credit increases, it should be in single digits. Credit utilization is calculated by credit cards and other personal lines of credit. Loans such as mortgages, student loans, and auto loans don’t count towards this. To lower your credit utilization ratio, consider:
- Requesting credit limit increases
- Adding Additional Lines of Credit
- Decreasing your spending
- Consolidate your debt into a personal loan
It is also necessary to monitor your spending and keep each individual balance under 30%. “Having 90 percent credit utilization on one of your cards won't reflect well on your score, even if your overall credit utilization is much lower. . .know what your balances are on all your cards and work to keep everything as low as possible,” [one expert] says. If you need further assistance in managing your debt, or want to discuss your options, Moody Bank’s wealth management team can guide you through the process.
Pay Bills on Time
Continuing to stay on top of your monthly bills and debt payments will not only establish you as a responsible borrower but can prevent you from overextending your credit. Consider setting up autopay for your bills so that you never miss a payment and make more than the minimum payments required for your credit card debts.
Keep Old Lines of Credit Open
As you pay off your various lines of credit, make sure to keep them open. Keeping old lines of credit available maintains a higher credit limit, which lowers your overall credit utilization. However, many lines of credit—especially credit cards—will close automatically if not used after a period of time. Be sure to make occasional purchases with all your credit cards, even the ones that offer fewer benefits.
Monitor Your Credit Scores for Errors
Subscribing to credit alerts from the credit bureaus will alert you to both good and bad changes in your credit score. Unfortunately, identity theft and fraud are real problems that could sabotage your credit improvement efforts if not dealt with swiftly. The sooner you spot reporting errors, lines of credit you didn’t open, or fraudulent activity, the sooner you can notify your financial institutions and restore your good credit standing.
Moody Bank has convenient locations in Houston, Austin, New Braunfels, and Galveston. Whether you are looking for new lines of credit, personal loans, or are saving for a major purchase, Moody Bank and its financial professionals are here to help. Stop by or contact us today!