Don’t allow your credit to take a hit from these crucial credit score components.
How can I Protect My Credit Score During COVID-19?
One of the biggest factors of how easy or difficult certain areas of your life will be as an adult is your credit score, the number that banks, credit card issuers and other lenders use to rate your creditworthiness.
This crucial number has a huge effect on whether your financial outlook is filled with stress and anxiety or a sense of optimism and security. That’s why you need to stay on top of the factors that comprise your credit score, especially during tough economic times caused by COVID-19.
Credit ratings from the three major credit bureaus – Experian, TransUnion and Equifax – and Fair Isaac Corporation (FICO), the score used by 90% of top lenders, fall roughly into these categories: excellent 800-850; very good 740-799; good 670-739; fair 580-669 and very poor 300-579.
Click or swipe for 6 factors that can affect your credit score and ways to improve your rating.
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1. First things first: Order a free copy of your credit report
Before you can find ways to improve your credit or keep it in the good-to-excellent range, you’ll need to review your report to find out where you stand. Fortunately, obtaining a copy of your credit report and finding out your credit scores with the three major credit bureaus is easy – and free.
Typically, you can order one free copy of your credit report every 12 months from AnnualCreditReport.com. However, due to COVID-19, Equifax, TransUnion and Experian are now offering weekly free online credit reports through April 2021.[1]
2. No credit history
When you don’t have a history of payments on loans or credit cards, that factor will hurt your credit score. You’re not the first person with this problem, however, so you have some options for improving your score.
For example, you may be able to raise your FICO score instantly if you sign up for Experian Boost, an account that adds positive payment history on your phone and utility bills to your credit report.
You could also apply for an unsecured credit card, which allows you to deposit an amount that will set your credit limit. Then make small charges and pay the balance off monthly to build a good payment history.
Find out: How to Fix Your Credit Score for Free
3. Late payments
Payment history accounts for 35% of your credit score, so one of the worst things you can do is lower your credit score by paying late or skipping payments on credit cards, loans, or other credit accounts.
If you can’t pay on time, try to work out a payment plan or other arrangement with the creditor to keep it from reporting late or missed payments to major credit bureaus.
4. High amount of credit card debt
Another major factor in how your credit score is calculated is what’s known as your “credit utilization rate,” the ratio of unsecured debt such as credit cards to the amount of your available credit. Your credit utilization ratio comprises around 30% of your credit score.
For example, if you have $10,000 in available credit and $5,000 in credit card debt, your credit utilization ratio would be 50%, which is too high. Ideally, it’s best to keep your credit utilization ratio below 30% of credit card limits or even lower. The key to improving your credit utilization ratio is simple: Pay off as much credit card debt as possible to lower your utilization rate.
5. Bankruptcy
When you file bankruptcy, the information appears on your credit report and stays on the report for seven to ten years. “Bankruptcy may help you get relief from your debt, but it's important to understand that declaring bankruptcy has a serious, long-term effect on your credit,” according to Experian.
Before you opt for bankruptcy, explore alternatives such as working with a nonprofit credit counseling agency to negotiate with creditors, taking out a debt consolidation loan, working out a payment plan with creditors or setting up a debt management plan.
Find out: The Pros and Cons of Filing Bankruptcy
6. Collections
When you don’t pay a collection agency a debt owed, the agency can report your collections account to the major credit bureaus. The collections information will have a negative effect on your credit score for up to seven years, since payment history accounts for 35% of your FICO score.
The collections account will automatically drop off your credit report after seven years has passed. However, try to avoid the negative impact of a collections account on your credit report by working out a payment plan or lump sum settlement with the collection agency instead.
7. Too many hard inquiries
“Soft inquiries” into your credit such as those by a new employer pulling a copy of your credit report, a credit card company sending you a preapproved offer or your bank requesting an updated FICO score don’t have any impact on your credit scores.
On the other hand, too many “hard inquiries” from multiple car dealerships in a short period, new credit cards you’ve applied for, or other lenders who review your credit as part of the lending approval process, can lower your score, according to Experian.
To avoid lowering your credit score with hard inquiries, don’t apply for more than one credit card in a short period of time or allow car dealerships or home repair companies to check your credit until you’re ready to buy.
This article by Deb Hipp was originally published on Debt.com.
Published by Debt.com, LLC
