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Are you interested in renting a home, getting an auto loan, securing a mortgage, or opening a credit card? Then be prepared for lenders to look at your credit score.
A credit score is a three-digit number that lenders use to estimate your behavior as a borrower, including whether you will make payments on time. It is calculated using several factors, such as your payment history, total unpaid debt and how much available credit you are using. Consumer Financial Protection Bureau,
A high credit score This means you’re more likely to get favorable interest rates and credit limits.
If you’re looking to improve your credit score in the coming year – or start from scratch, here’s what to know below.
Perfect ‘recipe’
According to Gregory Germain, professor of law and director of the Bankruptcy Clinic at Syracuse University College of Law, getting a high credit score depends on three key factors.
“The recipe for getting a high score is very simple: you must have a lot of credit available, have low utilization of that credit, and most importantly, have a long history of making payments on time,” he explains. Independent, In an email.
According to Germain, if your credit score has dropped and you’re looking to rebuild, it’s important to start by addressing existing debts.
He writes, “To rebuild your credit, you first need to get some credit, which is often the hardest part if you have a low credit score (or no credit history). Germain suggests starting small by applying for an unsecured credit card with a short credit line and always making payments on time.
It’s important to foster a healthy attitude toward your finances, Germain said, because having a high credit score “doesn’t mean you’re a smart money manager.”
Developing “responsible money management habits,” including spending less than you earn and avoiding unnecessary expenses, will help rebuild your credit and save money in the long run, he explained.
Pay in full – and on time
Germain recommends paying your credit card balance in full by the due date each month. This will help you avoid interest charges. However, there is a risk that last-minute payments won’t be processed on time, especially if you’re sending a check, Germain said. That’s when paying early can be helpful.
“Since interest rates on credit cards are so high, a smart money manager will get into the habit of paying off their credit card balance in full each month before the due date,” he wrote.
“Running the balance, and paying double-digit interest rates for the privilege, is a recipe for failure.”
Set up automatic credit card payments
Setting up autopay is a good way to ensure timely payments. Many major credit card providers will allow you to set up automatic payments that will be withdrawn from your checking or savings account each month.
“To make sure your payments are made on time, you can set up automatic [automated clearing house] A payment is initiated from your bank account by the credit card company for your entire balance each month – you just need to make sure there are enough funds in your account to cover the automatic payment each month,” Germain wrote.
Check Your Credit Report for Mistakes
Dr. Carly Urban, an economics professor at Montana State University, recommends that consumers check their credit reports to make sure there are no errors.
“Sometimes recording errors occur that have a major impact on credit scores,” Urban wrote. Independent.
If you get an error, US General Services Administration It is suggested to send a letter with supporting documentation to the credit reporting agency or company that provided the false information.
Beware of scammers
Germain warns to stay away from anyone who claims they can instantly improve your credit score in exchange for a fee.
“Be very skeptical of shortcuts to rebuilding your credit,” he wrote. “There are many fraudsters out there offering to instantly rebuild your credit for a generous fee. Credit rebuilding gimmicks will not work, and will cost you exorbitant amounts of money. The credit repair industry is rife with fraud.”
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