Sometimes, the need to borrow money can arise unexpectedly, like when your car breaks down and you need to take out a personal loan to cover the cost of getting it fixed. Other times, it’s easier to anticipate when you might need a loan, such as if you’ve been saving to buy a home and know you’ll need to finance that purchase with a mortgage.
No matter what borrowing plans you have this year, you should know that the higher your credit score is, the more likely it is that you’ll snag a more affordable interest rate on any loan you take out. And so it pays to work on boosting your credit score — before borrowing rates climb.
Why consumers should brace for higher borrowing costs
The Federal Reserve has plans to raise its federal funds rate several times this year. The Fed doesn’t set consumer interest rates — it merely dictates what rate banks charge one another for short-term borrowing. But the Fed’s actions tend to influence consumer interest rates, and so this year, borrowing rates are likely to climb across the board. That means everything from mortgages to car loans to personal loans could get more expensive.
That’s why raising your credit score now is critical. If you do, you might manage to eke out some savings the next time you have to borrow money. And if you’re signing a longer-term loan, like a mortgage, even a slightly lower interest rate could amount to a lot of savings over time.
How to boost your credit score
There are different steps you can take to raise your credit score. First, check your credit report. If it contains errors, correcting them could result in a nice credit score boost.
Next, assess your credit card debt. If you’re carrying a balance in excess of 30% of your total spending limit across your various credit cards, it could be damaging your score. If you’re able to pay some of that debt off, your credit score could rise.
Of course, paying off debt is easier said than done. Another tactic you can try to employ if you’re carrying a high credit card balance is to ask for a spending limit increase on your various cards. That could serve the important purpose of bringing your utilization ratio down.
In addition, set yourself up with a budget so you’ll have an easier time paying your bills on time and in full. Doing so could help your payment history improve, and that factor carries more weight than any other when calculating your credit score.
While consumer borrowing rates won’t necessarily skyrocket overnight, it’s fair to assume that interest rates will rise across the board as 2022 ticks along. If you want to set yourself up to borrow more affordably, make an effort to give your credit score a boost. And if it’s already in great shape, keep paying your bills on time and keeping your credit card balances to a minimum so it stays that way.
