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The current low interest rate environment is great news for borrowers, especially those who have good credit.
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Mortgage rates have been sitting around record lows, and many automakers have been offering no-interest financing.
But there’s a catch: In order to take advantage of these bargain basem*nt rates, you’ll need to have a good credit score – or preferably, a great one.
Lenders use your three-digit credit score to determine whether to loan you money and on what terms.
The higher your score, the more likely you are to get a lower interest rate for a loan, which can save you thousands of dollars in interest over time.
“A credit score is an indicator of your overall credit health as it relates to how you manage the debt you owe,” said Bruce McClary, senior vice president, communications at the National Foundation for Credit Counseling. “It primarily tells lenders whether or not it’s risky to lend you money.”
If you have a low credit score, you probably can’t take full advantage of today’s great rates… at least not yet. Take these steps to repair your score.
Find out about your credit history
You can’t fix a problem you don’t know you have. That’s why it’s important to know your credit score and regularly check your credit reports.
Your credit reports show your credit history. Normally, you can check your credit report for free once a year from each of the three credit bureaus: Equifax, Experian and TransUnion through AnnualCreditReport.com. But because of the pandemic, you can now get a free report from each agency every week through April 2021.
Your credit score is made up of five things: payment history, the amount you owe (your credit usage), length of credit history, your mix of different credit types and new credit accounts. While these free reports will not include your score, it’s still important to review them carefully to pinpoint what areas you need to improve upon.
“You can look at the report and identify the issues and specific accounts you need to work on,” said Rod Griffin, senior director of public education and advocacy for Experian.
Be sure to look for and correct any errors. Mistakes, including erroneous accounts and wrong account statuses that can damage your score, are common.
Many credit card issuers offer free credit scores to users, which can help you monitor any potential changes to your report. These numbers might not be exactly the same as what a lender might use, but still provide a good gauge of your credit health.
Tackle any missed payments
Making consistent on-time payments can be a big score booster.
Payment history is the largest factor of your credit score, and missed payments can be a drag.
“How much an individual’s credit score will drop from a missed payment depends on their unique credit history,” said Griffin.
Focus on getting current on payments you are behind on and staying on track. The longer you stay current after being late, the more your score could improve, according to myFICO, the consumer division of FICO, that created the FICO score.
Lower your credit usage
Another big part of calculating your credit score is your credit utilization, which is how much of your available credit you use. The general guideline is to keep your total credit utilization rate below 30%.
Paying off your debts and making sure your credit card balances are low help keep your overall usage rate low.
“The thing about increasing balances is that when you pay them down, scores will recover very quickly,” said Griffin.
Don’t rush to close cards
Closing a credit card account, even if you’ve already paid the debt off, could have unintended consequences.
It can hurt your score because it could increase your credit utilization ratio by lowering your available credit.
“It makes you appear more maxed out than you were before,” said McClary. “You may think you are doing yourself a favor by closing an account when it’s paid it off, but you are doing yourself no such favor, it is actually hurting your credit score.”
Establishing new credit
If you are new to the world of credit, there are ways to build up your profile.
Becoming an authorized user on someone else’s account can help create a positive credit history, but be sure the account holder has a healthy credit history.
Opening up a secured credit card can also help establish credit. Secured cards require a deposit that usually then becomes the spending limit.
There are also ways to get credit for payments not usually factored into reports.
For example, Experian Boost, which launched in 2019, allows people to have positive payments for things like phone, utilities and some streaming services to be included on their Experian file and potentially increase their score.
