If you haven’t been paying attention to your credit score, you best start. It determines how much you can borrow in this age of credit enslavement. Monitoring your credit score will help you fix the issues that are limiting your purchasing power.
Say you want to buy a home, but your credit score is too low to qualify for the loan amount you need to live in the area closest to your work. If you view your credit score before applying, you can not only save a hit on your credit when the bank runs a credit check, but fix some of the easy things that will raise your score.
Anytime anyone asks your permission to run a credit check, they are running what’s called a “hard check” of your credit score. Accumulating a bunch of these at once can sometimes lower your credit score, but if you’re buying a home and comparing mortgage rates, you’re often given a grace period to run hard checks of your credit score. I’ve been told by multiple loan officers that the grace period is 30 days, but it can be as little as 14 days and as many as 45 days. You should always check your credit score before running a hard check because using Credit Karma doesn’t affect your credit, and you might avoid applying for a loan for which you don’t qualify. Then you’re just hurting your credit score and coming up empty-handed.
Credit Karma not only provides your Transunion and Equifax credit scores for free, but also provides free tax filing software that’s truly free and includes tax forms for independent contractors for nothing. So now that you know the importance of your credit score and the best place to get it, here are 5 ways to improve your credit score and purchasing power that will put you in a position to get that loan you need.
1. Never use more than 30 percent of your credit
Credit utilization is the most important factor in determining your credit score. If any one of your credit cards has a balance that’s more than 30 percent of your credit limit, it will negatively affect your credit score. This is whether you pay off the balance each month or not, so don’t think you can just max out your rewards card every month and maintain a quality credit score. That’s not how it works.
If you see a credit card balance getting close to that 30-percent threshold, start using a different payment method. You can set up balance alerts with your banks to let you know when you’re getting close to 30-percent credit utilization.
If you have a balance that’s already over the 30-percent threshold, request a credit limit increase. If you’re not paying interest on that balance, pay off other cards to lower your overall credit utilization below the 30-percent threshold. You can even transfer balances from cards with high balances to cards with low balances, albeit at a fee.
2. Transfer credit card debt to a fixed-term loan
Lenders like fixed-term loans more than credit cards because the payback period is set in stone, whereas you can make the minimum payment towards a credit card and take as much time as it takes to pay it off. An auto loan with a fixed term and interest rate looks a lot better to lenders than a credit card running a balance for years. Lending Club is a highly reviewed fixed-term loan company and can help you get out of credit card debt while also improving your credit score.
Be sure to do your research, though. You don’t want to end up paying more in interest for a fixed-term loan than you would with your credit card. For instance, if you have a zero-percent, introductory rate on your credit card for a year, it’s not beneficial for you to consolidate that debt into a fixed-term loan on which you will pay interest. If you’re paying more than 15-percent interest on multiple credit cards, though, consolidating that debt into a fixed-term loan could be cheaper and improve your credit score.
3. Make an extra payment each month
Paying your credit cards twice per month is a great way to avoid missing a payment, which is the second most important factor in determining your credit score. If you always make at least the minimum payment two weeks before your due date and then again on your due date, not only will you never miss a payment, but you’ll pay off your credit card debt in half the time and pay half as much interest.
If you’re not already using automatic payments, you should be. Just setup an account from which your credit card company can withdraw payments each month and you’ll never have to worry about missing a payment.
4. Leave credit cards at home
You don’t have to use credit to improve your credit score. If you have a problem with credit card debt, the easiest thing to do is leave them at home when you go out for the day. Forcing yourself to pay for things with cash will not only keep your credit card balances from increasing, but probably keep you from buying things you shouldn’t. Credit cards allow for impulse purchases that otherwise wouldn’t be considered if all you had for payment was cash. Just considering what a purchase will do to your bank account might be enough to talk you out of the purchase. But if you keep telling yourself, “I have a month to pay this off,” or “I’ll take advantage of my introductory rate and pay it off in six months,” you’re probably buying things you don’t need with money you don’t have. Paying off purchases over time is how people end up living beyond their means and sinking their credit score. Don’t do that.
5. Know when to apply for credit
It takes time for your credit card companies to report information to the credit bureaus. You can get a good sense of when they do this by clicking “View score details” under your respective credit scores on Credit Karma, and then clicking “Credit card use” on the following page. This will tell you when your credit card companies last reported changes to your accounts.
You can also call the customer service number on the back of your card and get the exact date your credit card company reports and plan your credit applications around this. It usually takes three to five business days for changes to affect your credit scores, so give it a week after the reporting date and then check your scores to see if they’ve improved.
So there are 5 ways to improve your credit score and purchasing power. If you follow these steps you’ll be on your way to realizing the American Dream.
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