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 repair costs. Other times it’s easier to anticipate when you might need a loan, for example if you’ve saved up to buy a house and know you’ll need to finance that purchase with a mortgage.
Whatever your borrowing plans this year, you should know that the higher your credit score, the more likely you are to get a more affordable interest rate on any loan you take out. So it pays to work to improve your credit score, before borrowing rates go up.
Why Consumers Should Prepare for Higher Borrowing Costs
The Federal Reserve plans to raise its federal funds rate several times this year. The Fed doesn’t set consumer interest rates — it just dictates the rate that banks charge each other for short-term borrowing. But Fed 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 auto loans to personal loans could get more expensive.
This is why it is now essential to increase your credit score. If you do, you may be able to save money the next time you need to borrow money. And if you take out a longer-term loan, like a mortgage, even a slightly lower interest rate could mean a lot of savings over time.
How to increase your credit score
You can take different steps to increase your credit score. First, check your credit report. If it contains errors, correcting them could lead to a nice improvement in the credit score.
Next, assess your credit card debt. If you have a balance greater than 30% of your total spending limit on your various credit cardit could hurt your score. If you’re able to pay off some of that debt, your credit score could go up.
Of course, paying off a debt is easier said than done. Another tactic you can try if you have a high credit card balance is to request a spending limit increase on your various cards. This could serve the important purpose of reducing your usage rate.
Also, set a budget so you can more easily pay your bills on time and in full. This could help improve your payment history, and this 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 progresses. If you want to be prepared to borrow cheaply, make an effort to improve your credit score. And if it’s already in good shape, keep paying your bills on time and keeping your credit card balances to a minimum to keep it that way.
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