Finance Globe

U.S. financial and economic topics from several finance writers.
10 minutes reading time (2027 words)

Get a Good Credit Rating

A good credit rating is important, whether you've got great credit or are still working on getting there.

A few simple habits can ensure that your credit rating stays good, or keeps improving. A good credit rating gives you more choices, more benefits, and more flexibility, all at a lower cost.

When your credit score reaches the mid-700s, you can be confident that lenders are generally happy to do business with you. Credit scores of 720-750 and up are usually qualified for the best deals on credit cards and various other types of loans.

It's important to understand that everyone's credit score is based on their own unique financial situation, and some things that may be good for one person's credit score may be bad for someone else's.

For example, opening a new credit account may help someone's credit score if they don't have many other credit accounts, but it can hurt the score of someone who may already have too many credit accounts in the creditor's eyes.

Also, some factors may be good or bad for everybody's credit score, but in varying degrees. One late payment will do less damage if the account holder has a long history of on-time payments with many accounts. If the account holder only has a total of two accounts, one late payment will do a lot more damage to their credit score.

It's helpful to check up on your credit report and credit score once in a while to see where you stand in the eyes of your creditors. This number may be slightly different with each credit bureau, since they might not all have every one of your accounts on record, and they each have a slightly different method to calculate credit scores.

A difference of 20 points from the lowest score to the highest score is not uncommon. Keep in mind that this number can fluctuate on a monthly basis, and these little fluctuations are common.

Late or missed payments can do some serious damage to your credit score, so get those accounts current and keep them that way. Collections accounts should be paid off as soon as you can; be sure that they agree to update your credit report when you pay it. They may agree to take less than the full amount due if you can't afford the entire amount.

Even better than marking the past due account as paid, they may agree to completely remove the negative mark if you do pay the full balance owed. Talk to them and get them to work with you; they are usually pretty flexible since they know people who have accounts in collections are usually in a bad financial situation, and collection agencies will usually take anything over nothing.

Some things affecting your credit score may be more related to timing than to wise debt management. A high credit-utilization ratio can damage your credit score, even if you have a firm grip on your finances and never charge more than you can pay off each month.

Creditors report your current balance, every month, to the credit bureaus. If they report your balance just before you pay the bill each month, it looks like you are charged to the limit, and your score won't be updated when you pay off the balance later that month. The next month you may do the same thing; charge your card up pretty high, and then pay it all off.

To them, it just looks like you always carry a high balance. If you don't have many credit cards, it can be even worse for your credit score; the total balances are compared to the total credit limits for all your cards.

You can resolve this problem a few ways. You can ask the card issuer to increase the credit limit on your current credit cards. A higher limit will lower your credit-utilization ratio, as long as you continue to charge roughly the same amount as before.

A new credit card account will give the same effect, though the "new account" factor may slightly hurt your credit score for about a year. As a last resort, you could contact your credit card issuer to find out when they report your account activity each month. Then pay the balance in time for your "zero balance" to show up on your credit report.

When looking for more available credit, do your credit card shopping either very close to the same time-frame, or very spread out. Inquiries stay on your credit report for two years, and too many of them can look like you're desperate for credit and hurt your credit score.

Inquiries for the same type of credit (credit cards, car loans, or mortgages) that are all within a few weeks from each other are generally only counted as one; they know you are probably just shopping around for the best deal. You should also know that your current credit card issuers may pull your credit report when you request a credit limit increase, so keep those within a short period of time, too.

Your credit score may drop a little if you choose to get an additional credit card, especially if you don't already have an established credit history. New accounts can do some temporary damage to a credit score, until you've proved yourself with about a year of on-time payments. The more new accounts you have, the more it can hurt your credit score.

If you have years of good credit with many different types of accounts, it isn't likely to do too much damage. They say that time heals all wounds, and it does the same with new accounts; pay your bill on time every month and eventually the new account will grow to become another good mark on your credit report.

Not only does using too much credit hurt your credit rating, but your score can also be hurt by not using it enough. Let's say that you have decided to be smart with your finances and don't want to go into debt. You pay for nearly everything with cash or debit card. You have a credit card or two for emergency-use only, so you rarely use them.

You are smart to keep on top of your debts, but it's hard to prove that you'd be responsible about paying back the debt if you never have debt. The card issuer can only report to the credit bureau that you pay your bills as agreed if you use your card and then make the payment.

Use your credit cards regularly to put your credit rating in a better light. Most creditors report your account activity every month, and more good reports are better for your credit score. Use each credit card at least once a month, so that you can pay the balance on time and get a good grade for the month. Six months of on-time payments will do good for your credit score, and two years of on-time payments will do great.

Using more cards every month means also remembering more due dates, so set up on-line bill payment through your bank and you'll never forget to make the payment on time. Or, you can pay the bill on-line through your card's secure website right after you make the purchase. Either way, you'll improve your score when all your accounts show activity and on-time payments.

Older accounts benefit your credit score, due to the long payment history that comes along with them. Closing older accounts will probably affect your score more dramatically if most of your other accounts are fairly new, and not so much if you still have a pretty strong credit history without them.

Your credit rating is also affected by the types of loans you have. Your credit score benefits from having a variety of different types of loans, such as credit cards, car loans, and home mortgages. Your credit rating may suffer if you have nothing else but credit cards.

Some types of loans aren't so great for your credit score. Finance companies are thought to cater to people in the high-risk category, and getting one of these loans is often possible for even those with shaky credit. Many types of purchases are often bought through a finance company, including in-home sales, such as vacuums and water softeners.

Also, in-store financing for purchases like appliances and furniture are often paid for through a finance company. Too many loans from finance companies may have a negative effect on your credit rating, but even if the effect is positive, it won't be as good as a main-stream loan with a traditional lender, such as a bank.

Also, these types of loans are often very expensive, typically about 21% APR. You might save some money if you can transfer your balance to a low-interest credit card if you currently have these kinds of accounts.

It's a little disheartening if you realize that you have negative marks on your credit due to your own mistakes. But, it's downright insulting to find out that someone has pretended to be you to fraudulently gain credit. Protect yourself from identity theft, and check on your credit report at least once a year.

The law entitles you to a free credit report, once every year, from all three major credit reporting agencies at www.annualcreditreport.com. Check your report carefully for any accounts that you didn't apply for and report them immediately to both the reporting creditor and the credit bureau. File a police report, and keep a copy, to help provide documentation of the crime. Also, file a detailed fraud report with the Federal Trade Commission, at www.ftc.gov/idtheft to help them put a stop to these thieves.

It's really not necessary to worry excessively about your credit score, unless you're planning to make a major purchase in the near future. If you're thinking about buying a home or financing a car, then it's a good idea to know your current credit score and start taking steps to improve this number.

A higher credit score will get you a better, less expensive loan. Start working on your credit at least a year before your major purchase, so you have time to clear up any fraudulent accounts or inaccurately reported accounts. Keep paying your bills on time to show a long history of good debt management. Make sure all your accounts show a long history of on-time payments; don't open any new accounts or close old accounts during the year before your major purchase.

If you're shopping for a car, the lender will pull your credit report to see how big of a car payment they can approve you for; make sure your account balances aren't too high at that time. If you're looking to buy a home, know that the whole ordeal may take many months.

Since a lot can change in that amount of time, mortgage lenders usually do a pre-qualifying credit check to see how big of a mortgage you can handle, so you know your price-range, and then a final qualifying check just before you close on the home to make sure your financial situation hasn't changed. Keep low balances on all your accounts during the entire time you are house-hunting. And no matter what, pay all your bills on time!

A good credit rating is important to get the best deals on every kind of loan, but it shouldn't be more important than your financial health. Some things that may be good for your credit score may actually be bad for your finances. Don't go into debt just to raise a credit score; this can be a costly mistake in the way of interest charges, and may make it difficult to keep your bills at a manageable level.

Discipline and responsible use of credit will help you stay ahead of your debt. Always live within your means; you're the only one who can make wise choices based on your lifestyle, and your income and expenses.

Your credit score is just one of the many factors that make up your overall financial situation; make smart decisions and your good credit rating will follow.

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Tuesday, 20 August 2019

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