With a worldwide pandemic taking place, the economy is taking a nose-dive into a recession. The unfortunate turn in events has many people worried about their financial future as companies begin their rounds of layoffs. Unfortunately, this chain of events happened after FICO, or the Fair Isaac Corporation, had already announced that their current FICO score was going to be updated in the summer of 2020. According to FICO, the score would predict a more accurate representation of the borrower’s financial state. Because of the change, there’s a likely chance many Americans will see a downgrade in their scores. These are tough economic times as the economy is slowing down, so how can Americans protect their credit score during volatile times? Here are a few ways to prepare.
- Check your credit report for errors
We all know that it’s important to check your credit report a few times a year to keep your score updated. However, if you’re a business owner, you may not realize that it’s equally as important to check your business credit report. According to small business statistics in 2019, 33% of small business owners struggle with cash flow and need funding, which is highly influenced by their business credit score. Whether for business or not, checking your credit report is one of the preventative measures in keeping your score up. One reason is that you need to check your report for any errors or false information. Without an accurate report, your personal and business credit score could be greatly impacted by a mistake and lower your chances of loan approval. Companies such as Star Credit Repair ranks credit repair companies and can offer you a consultation to see if credit repair is right for you and your business.
- Build up your credit score with a secured credit card
There are a couple of reasons why secured credit cards are helpful for building up your credit. Unlike unsecured credit cards, secured credit cards have a credit limit that is based on a cash deposit you make. Let’s say you decide to open a secured credit card and make a deposit of $5,000. Whenever you swipe your card, the money is taken out of your account, lowering your credit limit. When you pay off your debt, then your credit limit returns to $5,000. The reason why secured credit cards are safer than an unsecured credit card is that the secured card is backed by your cash which serves as collateral. If you don’t pay off your credit card debt, the lender uses your cash deposit to cover the debt. You also receive your deposit back when you close out the account. Secured credit cards are safer and can help borrowers build up their credit until they can qualify for an unsecured credit card.
- Watch your credit utilization
Even if you’re not If you’re making all your payments on time, did you know that over swiping your credit card can affect your credit score? In fact, financial experts recommend keeping your usage ratio under 30%. This ratio is known as your credit utilization, which measures your overall credit limit with your amount of credit usage. To calculate your credit utilization ratio, you take your credit usage amount and divide it by your credit limit amount. Then you’ll take the resulting amount and multiply it by 100%, which will give you your percentage. For example, if you have a $5,000 credit limit, and your spending is $1,000, your credit utilization ratio will be 20%. Users with a credit limit of $5,000 will want to keep their usage under $1,500 in order to keep the utilization percentage under 30%. Any more than that can cause a negative effect on your credit score.
As FICO gets ready to release their new algorithm for estimating credit scores, Americans nationwide will, no doubt, be nervous about the change. As the market continues in its volatility, Americans should take note of these above tips and put them into practice before the major changes take place in the summer.
Disclaimer: This content does not necessarily represent the views of IWB.