How to Improve Your Credit Score
With the recent troubles facing many borrowers and lenders, now is as good a time as any to maximize your personal credit score. In the past few years many lenders have been to eager to fund mortgages for people with spotty credit histories. The results turned out to be disastrous. More than 20 of these sub-prime lenders have either gone under, or are well on their way. Sadly enough, many new home owners are also facing difficult times too. With foreclosures becoming all to common, and sub-prime lenders dropping like flies, those of us on the market for a loan are sure to face additional scrutiny. You credit score will need to improve as lenders begin to tighten their belts.
Whether you apply for a home loan, car loan or personal loan for that matter, a potential lender is first going to analyze your credit score. They use your credit score to determine how much risk they are taking when loaning you money. The higher your FICO score, the more likely you are to repay the loan. Until the recent decline in home values, lenders were quick to approve a mortgage for just about anyone, no matter what their credit score was. Well that was then! Now it’s more like credit crunch time! So as we forge ahead, a good credit report will be very important. There are several things you can do to better your credit report. Before we look at how to improve your credit score, let’s take a look at where a credit score is derived from.
There are 5 main areas that determine an individuals credit score.
1) Payment History…. Your past payment history says a lot about you. A steady on time payment history helps a potential lender feel more comfortable about your ability to honor the terms of a loan agreement.
2) Credit Balances…. When you apply for a loan, a lender will take a good look at what you currently owe on other loans. They want to be sure that you can take on the additional commitment of more debt.
3) Length of Credit History…. Another factor in determining an individuals credit worthiness is how long they have had credit. A good credit report is built over time. The longer you maintain your credit accounts, the better it reflects on you.
4) Different Types of Credit Accounts…. A lender will look into the different types of credit accounts you have. Unsecured lines of credit score differently than secured lines of credit. Home loans and car loans are considered secured because the house or car are used as collateral against non-payment. Credit cards and personal signature loans are unsecured because there is generally no collateral required to secure the loan.
5) New Accounts…. Even though your past credit history plays a big role in your overall credit worthiness, new credit accounts also make up a portion of your overall credit score. As you take on new accounts it will pull your credit score down somewhat until the balances are paid down a bit. If you plan on applying for a sizable loan (home or car) in the near future, don’t open up a bunch of new accounts prior to that.
Pull a copy of your most recent credit report, take a close look at everything that’s listed, and make a plan of action to start improving those scores. Now that you know how your score is obtained (see above), let’s cover some areas where you can do some things to bump up that beacon score.
Payment History…. Pay your bills on time! If you have been late in the past, start paying on time from this day forward. Don’t wait till 1 day before the due date to send in the payment. Mail your payments in well before the due date. Don’t count on the post office to get it there on time. Always leave a cushion. With many credit card companies today, all it takes is 1 late payment and your interest rate goes up 10%! If you must pay late, contact your creditor and try to work something out. It will reflect much better on you if the creditor is aware of the current situation. Late payments will drive down your credit score in a heartbeat!
Good Debt Management…. Don’t rack up those credit card balances to high. Keep your debt to a minimum. A good rule of thumb, don’t use up more than 50% of your available credit line. High debt to income ratios will hurt your score. Don’t play the balance transfer game all the time! Don’t open new accounts just for the purpose of transferring balances. Just pay down the balances by making higher payments. Don’t close all your unused accounts. Having some accounts with zero balances can actually help your credit score.
Credit History…. The longer your credit history, the better. Stay away from opening to many new accounts in a short period of time. This can reflect badly on you. It takes time to build up good credit.
Be Responsible with New Credit…. Attempting to open too many new accounts in a short period of time will produce more credit inquiries than you want. Having inquiries pulled often can pull down your score. If you currently have credit problems, try to open a few new accounts and pay them on time! If you are shopping for a home loan and are getting quotes from several lenders, have the inquiries done as close together as possible. Pulling your own credit report will not count as an inquiry.
Various Types of Credit You Use…. A good balance of credit, like a combination of credit cards along with installment loans (loan with a fixed payment) can help to raise your score, provided the payments are being made on time. It’s good to have a mix of different types of credit. Don’t go out and open a bunch of accounts just to have more types of credit. Even accounts you close or have paid off will still remain on your credit report, and can reflect on the overall score.
Good credit is important to have. Utilize these areas to improve your credit score. Learning how to manage your credit will go a long way towards obtaining and maintaining a solid beacon score. You may not need to rely on credit now, but someday sooner or later you’ll need it. Start managing your personal credit now, be patient, and when the time comes to buy that house or car, you’ll get the lowest interest rate available.