Setting the Goal to Improve Your Credit Score
If you are part of the 60% of people that make resolutions, you are probably doing so right about now. You are feeling good and determined and ready to take on the world. Within a few weeks, though, only about 8% of people that make those resolutions actually accomplish them. Most give up on the resolutions within a month.
One of the biggest reasons people fail to meet financial goals is actually a really easy one to fix: they do not make a plan to reach it. Another reason for failure is that the person does not make them specific enough. Just making resolutions is not going to get you anywhere. Think about it: If you decide that you want to go to France, you will not magically appear there. You have to actually make a plan to get there. What’s more, you need to decide where in France you want to go, where you will stay, and so on.
The same is true with resolutions. Financial goals appear on many people’s resolution list, including cleaning up credit. If you are one of many looking to improve your credit score, you need to make a plan with a specific goal to reach. If you are ready to start, let’s go.
Know Where You Stand
You have to know where you are starting to determine how to achieve your resolution. If you were planning a trip to France, you need to lay the groundwork first. You cannot get a plane ticket until you know what airport you will take off from. In the same way, you have to know your starting point with your credit.
This means that your first step to improving your credit score is to get your credit report, preferably from all three credit bureaus, and get your credit scores. They will often vary between the different bureaus, so it is best to get all three.
After you receive your credit reports, take some time to look at all of the information on them. Is there anything you do not recognize? If so, you need to dispute it with whichever credit bureau that report came from. You can do this online through each bureau’s website.
What Makes Up Your Credit Score
There are five things that make up a credit score:
10%- New credit accounts/inquiries- Every time you apply for credit, an inquiry hits your credit. The number of inquiries you have affects your credit score.
10%- Types of credit- Types of credit, or credit mix, is determined by how many revolving accounts and installment accounts you have. Revolving accounts are those with which you have ongoing credit, like credit cards. Installment accounts are those you pay back in a set number of payments, like personal loans or mortgages.
15%- Length of credit history- Length of credit or credit age is how long you have been using credit.
35%- Payment history- This shows whether you have paid your debts in the past, missed payments, or paid late.
30%- Credit utilization- Credit utilization is all about how much credit you have available to you and how much of it you are using.
Planning Your Steps to Improve Your Credit Score
Ok, so you have your credit reports and credit scores, and you have some understanding of what those scores mean and how they are calculated. Now, it’s time to make your actual plan that will improve your credit score. Everyone’s plan should look different because everyone has different things on their credit. This means that you need to pay attention to what is making up your particular score. This is also where something like Credit Karma can come in handy because it can give you specific suggestions on how to improve your credit based on your credit report. The following are the most common steps to improve your credit score. You should choose the steps that best suit your factors.
Pay Off Debt
Paying off your debt needs to be a top priority, especially if you owe a lot. Take a look at the debts that are listed on your report and add up the total. Based on that total, choose an amount that you want to pay off. This amount is up to you, but the more you pay- theoretically- the more change to your credit score, assuming no new debts are added.
Now, let’s say your goal is to pay off $1,000 in debt this year. Right now, before you move onto anything else, pick debts you can pay off with that amount and list them. For instance, if you have 10 debts that are $100 each, you can pay them all with your $1,000, so list those 10. A good rule of thumb is to choose the newest debts first because debts have the highest impact in the first two years they are on your credit report.
Next, figure out the amount you need to pay out monthly to reach your goal. With our example, $1,000/12 months= $83.34, so you need to pay $83.34 to one of those debts each month. Add that to your budget now so that you can determine if you will need to pick up a side job or something similar. The earlier you figure everything out, the quicker you can put your plan to work and the greater your chance of success.
Open New Accounts
You may find that you are using too much of your available credit. Paying off debts can help you lower the amount of credit you use, but opening new accounts can help, too. You need to be careful here, though. You do not want to open too many new accounts at once or take out money that you really do not need. Opening just one to two new accounts can make a big difference but do remember to keep your utilization under 30%. If you use all of the available credit, you are hurting yourself.
For those who are thinking that their credit is too bad to open new accounts, don’t give up. There is a way to do this, even with bad credit, and we will talk about that in a moment.
Mix It Up
You need to have a mix of credit types, so do not just open credit cards or just installment loans. If you open new accounts, try opening each. That will help your credit score as well.
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Start Better Habits
In general, start better financial habits. Be honest with yourself. Are you always late paying your bills? Focus on being on time. Do you let your credit cards carry a balance each month? Let part of your plan be to pay it down to X amount of dollars each month. Whatever your bad habits, it's time to change them or you will just end up in this same position over and over again.
Set Milestones
Another reason people fail at reaching their goals is that they lose motivation. This can be incredibly easy to do, especially when your goal is a big one and it takes time to get there. It’s often hard to see our progress, so we give up feeling like we are wasting time.
Fortunately, this is an easy thing to fix. If you set milestones, you start seeing progress more quickly. You might give yourself a little reward for paying off every $100 in debt or for each debt you pay off. The reward does not have to cost anything and it does not have to be a huge one. Just choose something that will make you feel good, like watching a movie or taking a warm bubble bath- something like that.
When you have reached the full goal, do something big- take a weekend trip or go out for a nice dinner. Do not do anything that will put you in more debt but do reward yourself for your hard work.
Financial Goal Plan Example
Ok, let’s pull it all together. Here is an example of what your goal and goal plan might look like:
Goal: I will raise my credit rating from fair to good by the end of 2020. I will do this with the following steps:
I’ll pay off $1,200 in debt by taking $100 per month from my regular income. To make this happen, I will skip my morning Starbucks run twice a week and take my lunch to work two times per week. The following are the debts I will pay off in order:
Debt 1
Debt 2
Debt 3
Debt 4
I will also lower my credit utilization by not carrying a balance on my credit card and opening one new account.
Each month I succeed in these goals, I will allow myself to have a lazy day without interruptions.
Of course, your plan will probably look a lot different. It may be longer or have fewer steps. This was just to give you an idea.
Take a look at the example. Do you see how easy it would be to simply plug these steps into your daily life? Instead of simply setting the goal, “Improve My Credit Score”, this example has specific steps that I can take and put to work. If you want to reach your financial goal to improve your credit score, you need to know exactly how you are going to do that.
Understanding Credit Scores
Once you have your credit scores, you need to understand what they mean, so below are the different credit scores explained for you. Before we get to that, though, it is important to know that there are different scoring systems, but the two most common are FICO and VantageScore. Both of these are shown below:
FICO Score
800-850- Exceptional-
740-799- Very Good
670-739- Good
580-669- Fair
300-579- Very Poor
VantageScore
750-850- Excellent
700-749- Good
650-699- Fair
600-649- Poor
300-599- Bad
Many places will give you your scores if you pay their fee, but you can get them for free. There are quite a few banks, such as Capital One, that offer your free credit score through their CreditWise app. Companies like Credit Karma show you your credit scores for free as well as a breakdown of the score.
Every lender has its own criteria for the required credit score to approve you for credit. One lender may require a score above 800 and another may approve any score over 580. However, it is very common that the lower your credit score, the higher your interest rate.
Obviously, you want the highest score you can reach, but try not to set your goal too high. You want to improve your credit score, but you do not want to aim so high that you set yourself up for failure before you even begin.
For instance, if you fit in the Very Poor/Bad category, you probably should not set your resolution to be reaching Exceptional/Excellent- at least not right now. You can set another goal once you reach this one. Instead, aim to improve your credit score one, at most two, ratings for this year. Those with Exceptional/Excellent credit reach that rating because their credit reports show little to no negative credit history, a great balance of credit usage, and other favorable credit characteristics.
This can be a bit difficult to reach, especially if you are starting with a low rating. Many that have this rating have had good financial habits for their entire credit history. Due to that, they tend to get approved for more loans, lower interest rates, and more favorable repayment terms.
Good/very good credit are still good places to be. If you are in one of the lower two ratings, you want to work hard to get out of those. Those credit ratings do make it more difficult to find loans, and they almost always lead to high-interest rates.
So, what credit rating do you want to aim for? Remember, don’t set your goal too high too fast. Also, instead of naming a specific credit score, just aim for the rating. Scores can vary by a few points every day, so aiming for a set score is not a good idea. Write down your goal credit rating, and keep reading.
Getting a Personal Loan to Improve Your Credit Score
A moment ago, we talked about opening new accounts. Let’s talk a little more about how to use a personal loan to improve your credit score. There are two major benefits to it: you can use a personal loan to pay off debt more quickly, and you can use it to improve your credit utilization. But what if you have bad credit or poor credit?
Well, first off, there are many lenders out there- in person and online- so you may still find one to approve you. If you fill out some basic information below, we can connect you to a suitable lender:
Second, you can still normally get a secured loan. With a secured loan, you put up some collateral and the lender loans you money. If you do not repay the loan, they have the right to your property. These loans can be very helpful to those that have bad credit because lenders are more likely to approve you as it is less risky for them. As long as you make your payments on time, you keep your property and get some good payment history reported to the credit bureaus.
There are also secured credit cards that work the same way. With these, your collateral is in the form of a security deposit. Whether you use a secured loan or a secured credit card, you still have the chance to improve your credit score
Conclusion
If you followed the above steps, congratulations! You have made a big step toward your goal. Choosing to improve your credit score is an awesome goal that can positively impact your life for years to come. No one knows the future, so we never know when we might be in need of a loan or want to make a large purchase that requires good credit. When it comes to good credit, it is better to have it and not need it than to need it and not have it.
By setting your goal and putting a specific plan in place to meet it, you are giving yourself a higher chance of success. If you need to, ask a friend to be your accountability partner. You can also set up automatic payments on your debts to be sure you do not forget each month. Make every necessary move now to set yourself up for success. Start imagining the finish line now: the day when you see that all of your hard work was worth it because your credit score has improved.