Finance Globe

U.S. financial and economic topics from several finance writers.
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10 Steps to Improving Your Credit Score

Your credit score is the three digit number lenders look at to determine whether they will grant you credit, and at what price. This number tells lenders how well you’ve handled your past and current debts, and how well you’re likely to handle them in the future.

Several credit-scoring systems are in use in America today, but your FICO score is the most commonly used, especially by mortgage lenders. Fair, Isaac, & Co, who developed the FICO score, will not divulge the exact method used to compute this number, but all the information they use is found in your credit report.

FICO scores range from 300 to 850, and higher is better. Many lenders have minimum score requirements for their best rates, so having a higher credit score really does amount to saving you money. Though your credit score cannot be changed overnight, there are steps you can take to gradually improve this number:

1) Be sure that your credit score is based on accurate information. It’s important to periodically review your credit report, and you are entitled to a free report every year from all three major credit reporting bureaus; Experian, Equifax, and TransUnion. Don’t request this free report from the agencies individually; you must go to www.annualcreditreport.com or call (877) 322-8228 begin_of_the_skype_highlighting (877) 322-8228 end_of_the_skype_highlighting.

2) Report any false information to the appropriate credit bureau. Do all the accounts belong to you? Are there any accounts reported as late or not paid that you know were paid as agreed? Do you have negative reports from longer than seven years ago (ten years for bankruptcy)? If there are any accounts that are not reported accurately, contact the reporting agency immediately. They are required to investigate the account in question and come to a conclusion within thirty days.

3) Pay your bills on time. Accounts that are paid late by thirty days or more can show up on your credit, and that can really hurt your credit score. Most creditors don’t report late payments to the credit bureaus if they are paid before the next billing statement, but you should always pay them on time anyway to avoid getting hit with default rates. It's less damaging to your credit score for one account to have several late payments than for several accounts to have one late payment.

4) If you have any delinquent accounts, get them paid up as soon as possible. Recently late payments affect your credit score more than late payments from many years ago. You can’t change the past, but once you get all your accounts current, keep them that way. Your credit score will eventually improve after showing a long history of making payments on time.

5) Keep balances low on credit card and other revolving debt. Your credit score will be higher if you show that you can use credit responsibly. Having a low credit-utilizatio ratio shows that you are smart in your spending and will be less likely to take on more debt than you can afford. Avoid “maxing out” your credit cards, which makes it look like you can’t control your spending. It's better to keep your balance under about 30% of your limit.

6) Using your credit cards responsibly is better than not using them at all. Use your credit cards wisely and pay them off each month. It’s better to carry a low balance and make payments on time to show that when you do use credit, you will make your payments as agreed. Just having the accounts open but not using them won’t help you establish a healthy repayment history.

7) Avoid closing accounts with generous credit limits if you are carrying a balance on other credit cards. As mentioned in #6, part of your credit score is determined by your credit-utilization ratio. Let’s say you have three accounts with a total credit limit of $15,000 and you carry a balance of $5000, using 33.3% of your available credit. If you close your zero balance account and only have $10,000 now available, you would be using 50% of your available credit. Closing the accounts you don’t use will increase the credit utilization ratio, lowering your credit score.

8) Show a long credit history. Time is a big factor in proving your credit-worthiness. Consumers who are new in the credit market will simply have to establish credit over time to watch their credit score increase. If you’ve built your good credit over many years, paying your debts as agreed will be evident in your credit report, increasing your credit score. Also factored in your credit score is the age of your oldest and newest account, as well as the average age of all your accounts. Having your credit accounts for a longer period of time and managing them well shows you can handle your debt. Be careful about closing your older accounts if you have several fairly young accounts; this can lower the average age of your accounts and lower your credit score.

9) Only open new credit accounts if you need them. You don’t want to open more accounts than you need just to raise the credit-utilization ratio; this can backfire and actually hurt your score by lowering the average age of your accounts. If you're shopping for a new loan or credit card, do it within a short amount of time; your credit score won't be affected by having several inquiries on your credit report if they are all within about thirty days of eachother. They understand you are in the market for the best terms on a loan and they give an allowance for that.

10) Remember that there is no “quick fix” for your credit score. Your credit score is determined by many factors, and since every consumer has different types of loans, a different length of time in the credit market, and a different situation, the method of credit scoring will not be exactly the same for everyone. Some actions may help one person’s score and hurt someone else’s. The best answer is to manage your debts responsibly and your credit score will gradually improve.

A good credit score will follow responsible debt management. Your credit score is important for qualifying for better terms on credit cards, loans, and mortgages. It’s important to do what you can to keep this score high, especially if you will soon be in the market for a major loan, like an auto loan or a mortgage.

Raising your score can put you in the bracket that allows you to get better interest rates, easily saving you thousands of dollars over the term of the loan. Just don’t get caught up thinking that your credit score is the only thing that matters in your finances. Some decisions that may be good for your credit score could hurt you financially in the long run.

Keeping credit card accounts open might be good for your score, but if it leads to temptation to spend more than you should, it’s probably not the best financial decision. Use good judgment for what’s right for you and your good credit score will follow.
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Friday, 23 August 2019

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