Despite the huge role that credit scores play in most essential transactions, a CNBC report on how credit scores are determined reveals that 4 in 10 Americans don’t understand the. Moreover, 37% said they had no idea what goes into their score at all. This means that millions don’t know how to even protect the credit score they have. The lack of understanding poses a big problem since this leaves a lot of opportunities for your credit score to lower.
Fortunately, there are many ways to protect your credit score even if you don’t quite yet fit traditional financial requirements. Here are some of them.
Add utility bills to your credit report
About 35% of your FICO credit score is determined based on how timely or poorly you’ve made your necessary payments. If you’ve had a late or “delinquent” payment, this is marked on your credit report for up to seven years. Thus, to avoid this, aside from paying on time, do add your utility bills to your credit report. It may seem odd to do this since it only increases the payables on your report. Considering that utilities are some of the most common top-of-mind monthly payables, adding them to the report gives you more material to show off your ability to pay.
To do this, a credit report post from the Consumer Financial Protection Bureau states that most utility companies don’t actually report your paying history to the big three consumer reporting agencies. Thus, you may have to contact each utility company yourself. Ask them to report your payment history to the credit bureaus. Though they’re not obligated to do this for you, many will be willing. This can help beef up your credit report.
Increase your credit limit
Although it may sound ironic, increasing your credit limit can actually be a great way to protect and even improve your credit score. As explained in a guide to credit scores, upping the present limit of your credit cards can help increase the ratio between the amount of credit versus how much you’ve used. The better this ratio is, the better your credit score and report will be. That said, this approach does require a few factors that not everybody may have.
First, you have to have a debit or credit card. After all, you can’t increase the limit on something you don’t have. Second, you’ll need to be very disciplined. It can be tempting to spend more once you’ve got a higher limit. However, for this strategy to actually protect your credit score, you should avoid spending your additional credit. Once you’ve accomplished this for several months, though, rest assured that your credit score will benefit.
Take out a loan
If you don’t have a credit or debit card, another way to better your credit score is to take a loan. As discussed in our blog on building credit without cards, there are various loans that can build and protect your score. These include auto, student, personal, mortgage, and credit building loans. Apart from the latter credit builders, every other loan type has the added incentive of helping you achieve another goal.
This can be something like getting a degree or getting married. For these loans to work in favor of your credit score, ensure your lender reports to the same credit bureaus. This way, every payment you make will be recorded in your history. At the same time, choose a lender who offers the best interest rate. Getting a loan with too high of an interest rate will just require higher monthly installments that can cause defaulting.
Consolidate your rate shopping
Most adults have to apply for a credit card or loan at some stage, so it’s better to do all your rate shopping at once. This is because doing separate and spaced-out inquiries can result in some lenders seeing lower scores. This can be due to hard inquiries made from earlier lenders. As noted in an article on mortgage shopping, hard inquiries can result in up to a five-point deduction in your credit score.
Therefore, in order to protect your credit score from being affected by multiple inquiries, space out your rate shopping within a two- to three-week period. By doing so, you’re preserving your credit score at an optimal number and preventing it from getting compounded deductions.
Admittedly, credit scores aren’t designed to be the most inclusive. However, there are loopholes and clever ways that ensure everyone can protect and even build their financial security. With some discipline and diligence, you can preserve your credit score and use it to seal your financial independence.
