Low credit scores result in higher interest charges. Borrowers with a FICO credit score of 700 save an average of $648 in interest on their credit card, $1,392 on their car loan, and $2,340 on their mortgage each year, compared with borrowers who have scores below 620, according to a study by CardHub.com, a credit-card comparison website.
For consumers looking to buy a home and willing to scale back on credit card usage, says the Wall St. Journal, there are five sure strategies for boosting your credit score:
Pay down credit card debt – Borrowers with the best credit scores use an average of seven percent of their total credit-card limit. Borrowers who surpass 10 percent of their credit limit will see their FICO score drop, even if they make monthly payments on time. Ideally, you should pay off your balance each month. If you carry a balance, put the card away and pay off the balance as soon as possible. A stop-gap option is to ask your creditor to increase your spending limit, which could increase your overall credit score.
Convert credit card debt to a personal loan – Credit-card debt is more damaging to credit scores than a personal loan, which is considered installment debt. That’s because the credit-utilization ratio does not take installment debt into account. Also, a personal loan will likely have a lower interest rate. So converting the debt to a personal loan, and paying it off efficiently, makes sense – but only if you stop using the credit card until the loan is paid.
Be selective about accelerating payments – For the same reason, consumers looking to improve their credit score should pay off credit card debt first, rather than student loans or other kinds of debt.
Check credit scores regularly – One in three consumers has errors in at least one of their credit reports (Equifax, Experian, and TransUnion.) Errors can send your score plunging. Get a copy of your credit report for free every year from annualcreditreport.com. If you spot errors, contact the credit bureaus, which are legally required to respond within 30 to 45 days.
Pay on time – the quickest way to harm your credit score is to miss a payment. Late payments can stay on your credit report for seven years, so the first rule in improving scores is to pay on time each month.
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