A good credit score is the key to earning low interest rates on everything from credit cards and auto loans to home mortgages.
According to the Federal Reserve Bank of New York, total U.S. household debt recently hit an all-time high, largely due to increased amounts of student loans, credit card debt and auto loans.
The combination of higher interest rates and increased debt levels is a one-two punch that can strain many household budgets.
High Rates Mean Even ‘Average’ Credit Can Be Expensive
The Consumer Financial Protection Bureau notes that lenders use credit score tiers as one of the strongest predictors of lender behavior. Those with lower credit scores are statistically more likely to fall behind on their payments. This increases risk for the lender, who compensates by charging a higher interest rate.
Someone with excellent credit might qualify for a credit card interest rate in the 15% range. However, those with fair or poor credit scores will likely see rates of 25% or more. The same pattern is true for personal loans, auto loans and home mortgages. With overall interest rates being elevated, it takes an excellent credit score to get even an average-sounding rate.
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Increased Debt Levels Add to the Expense
The high debt levels American households carry on average don’t leave much margin for error. Interest charges already eat into monthly cash flow, and increasing debt levels make the problem worse. Improving your credit score can hold your cash flow steady by offsetting rising debt levels with falling interest rates.
Ways To Improve Your Score Rapidly
There are plenty of ways to improve your credit score over the long run, and paying your bills on time month after month is among the best. But making timely payments on your cards won’t dramatically boost your score in the short term. Here are some strategies that can work more quickly:
- Pay off as much debt as possible: If you can pay off all your debt, your score will jump markedly. But if that’s not immediately feasible, pay off as much as you can as quickly as you can. Your initial goal should be to lower your credit utilization to below 30%, both on individual accounts and on your overall balance. Knocking that down further, below 10%, can produce noticeable score gains quickly.
- Correct any errors in your credit report: A Consumer Reports study of more than 4,000 participants showed that 44% of those who successfully checked their credit report found at least one mistake. If you have a major error in your credit report, a successful resolution with the credit bureaus could boost your score rapidly.
- Avoid actions that will damage your score: Many consumers get caught in a debt spiral in which their balances keep increasing and they keep applying for new credit as a supposed solution. Avoid opening new accounts, taking on debt or missing any payments while you dig your way out of your hole.
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This article originally appeared on GOBankingRates.com: Why Your Credit Score Matters More Than Ever With Interest Rates Still Elevated
