How To Improve Your Credit ScoreWe live in a credit-based economy, and your credit score is the golden number that holds sway over credit card, loan, and mortgage applications. It can even affect your ability to obtain a bank account. Talk about having a massive impact on your life! Any of these financial applications can either be a walk in the park or a doomed quest. The outcomes are entirely dependent on your score.
Whether or not you have a "bad" score, making an effort to improve is always a good idea. How do you go about doing that? First, let's learn a little bit more about this immensely important number.
What is a Credit Score?Beauty is in the eye of the beholder. In this case, the beholder is any potential lender. You see, your score--also commonly known as your credit rating or FICO score--is a numeric representation of your so-called "creditworthiness." The number tells a potential lender how risky it is to give you a loan or mortgage.
The minimum score is 300, while the maximum is 850. The lower the number, the higher your perceived risk--and vice versa. Your rating comes from your credit report (also known as your credit history) through a review of five main components, each given a different percentage of importance:
Payment history - 35% Impact
Amounts Still Owed - 30% Impact
Credit History Length - 15% Impact
Number of Credit Types - 10% Impact
Number of Account Inquires - 10%
Three major reporting agencies track your history, Equifax, Experian, and TransUnion. They analyze the information listed above, and they assign you a number that has a huge influence on your financial life.
How to Improve Your ScoreBefore we talk about the best way to improve your rating, it's important that you understand there is no magic wand or quick fix. This endeavor is going to take time and dedication. A beneficial lifestyle change is going to improve your life and chances of financial success. It's worth the time and effort it takes, so why wait?
Start by getting a copy of your credit report. You're entitled to a copy of your report from all three major reporting bureaus, free of charge. Don't cartwheel out the door just yet, though! Improving your rating is a long-term plan. Rather than getting all three reports at once, spread them out equally over the year. This tactic will allow you to track your progress. Get one of the three free reports every four months.
StrategiesFix any errors. Review your reports very carefully. People make mistakes, and those mistakes may have found their way onto your report. For example, your report may claim you missed a card payment when you most certainly didn't. Errors like this can negatively affect your score. If you find any such errors, immediately dispute them online through Equifax, Experian, or TransUnion. You have only 30 days to file a dispute from the day you received your report, so review the report carefully as soon as it arrives, and get moving on any issues.
Know your limits. While inspecting your report for errors, pay particular attention to your stated credit limits, especially if your limit has recently increased. If your card issuer increased your limit but forgot to report it, the increase wouldn't show on your report, and it might look like you've maxed out your cards (or close to it) when that's not the case. This mistake is not good for your rating. If it happens, dispute it and get it fixed.
Try out your negotiation skills. Let's say, for example, you were unable to keep paying a bill, and the bill went to collections. That's going to show on your report and affect your score negatively. However, even though it may be bold as brass, you could give those kind folks at the creditor's office a call and request they erase the debt that went to a collection agency. Simple, right? Not really. It's going to cost you money. The creditor will only show any signs of interest if you are willing to pay the remaining balance. This deal is only a good deal for you if the creditor is going to either erase the debt or at least mark the account as “paid as agreed” on your report. Get everything in writing. Don't hand over a single dime until you have a written agreement.
Get some plastic. Having a couple of cards can boost your score. There's one slight catch, though. You need to pay your bills on time, every time. Falling behind will just make your problem worse.
Under-use your cards. You might be known to the staff at Amazon as the "fastest cards in the West," but don't go crazy. Not a lot of people know that your credit utilization ratio affects your rating. The utilization ratio is what percentage of the card limit you use, and what's left over. If your card has a limit of $5,000, and you're using $2,500 of it, your utilization ratio is 50%. You should use no more than 30% of your limit. The less, the better. To seriously improve your score, it's best to keep the utilization ratio at 10%. Sorry shopaholics, better break out the tissues and chocolate.
Pay bills with your card. You have to pay the bills anyway. Instead of paying with cash, use that card, and then use the cash to pay off the card. You just paid two bills on time, and that helps your score.
Increase your limit. You can probably see where this one is going. It's using math to your advantage. As mentioned above, a card with a limit of $5,000 carrying a balance of $2,500 has a utilization ratio of 50%. Rather than paying off your card, how about asking the issuer to increase your limit? As a very rough example, if your card issuer increases that $5,000 limit to $10,000, a balance of $2,500 will suddenly go from being a 50% to 25% utilization ratio! Now folks, don't blow this one. This strategy only works if you don't increase your spending!
Can't get any plastic? If you have trouble getting a traditional credit card, you can get a secured one instead. It just costs a small security deposit and will do wonders for your score--if used responsibly. Again, pay those bills and pay on time!
Still can't get any plastic? Can't even get a secured card? Rough day, but it's not the end. What's next? Well, you could use an old Jedi mind trick and convince a friend or family member to make you an authorized user on his or her card. If somebody agrees, treat it as you would any serious business arrangement. Make a reasonable agreement on how much you can spend on this card, plus how much of the bill you will cover, and put it all in writing. Being responsible always pays off in the end.
Final WordIt's worth mentioning again; your score doesn't have to be bad for it to be a good idea to work towards improvement. Not only is it easier to obtain mortgages, personal loans, auto loans, cards, or any other type of loan you can think of -- the higher your score, the lower your interest rates will be on any obtained loan. That's a pretty big deal, and it amounts to a lot of cash over time.
Just remember to space out those free report requests. It's the best way to see how your plan is progressing and doesn't add to the number of report requests. That way, if you follow the above strategies, you can see your hard work paying off over time, and consistently address any errors that may arise. Better credit is one sure way to make life a lot easier.