CREDIT SCORE ENHANCEMENT – WHAT YOU CAN DO TO IMPROVE YOUR CREDIT SCORES
Credit scores change all the time to reflect your credit patterns. Any time you check your credit score, it is like a snapshot of your score at one given moment in time. Most of the time, a score doesn’t change much from month to month.
It is a good idea to check your score about every 6 months, and 6 months prior to buying a home. That way, if you find your score is not what you’d like, you have several months to take steps to improve it, what is known as Credit Score Enhancement.
Although credit scoring models are complex and differ among creditors, there are some basic breakdowns of scoring:
- 35% of your score is made up of your payment history.
- 30% is made up of the amount owed.
- 15% is made up of the length of credit history.
- 10% is made up of new credit.
- 10% is made up of the types of credit used.
1. The best way to enhance your score is to pay your bills on time. Managing your credit well over a period of time is the best thing you can do. Most scoring models take into account how late a payment is, how recently the late payment occurred, and how many late payments there are in total. Once you have a late payment, the damage is done. The negative impact of the late payment will dissipate with time, and late payments involving smaller amounts are not as significant as those with larger amounts.
2. Limit outstanding debt. (30%). Most of the models take into consideration the ratio of the amount of debt to amount of credit. [debt/available credit] Ideally, you should keep that amount to 30% or lower. The higher the ratio, the more negative the score. Owing a lot of money on your accounts can indicate that you are over-extended. Having a small balance and making the minimum payment is the way to show that you use credit responsibly, and is actually better than having no balance at all. Check to make sure that your revolving accounts are reporting your credit; it does no good to have the credit if it is not being reported.
3. Preserve the length of your credit history. (15%). Don’t close unused accounts, because the length of your credit history is important. An insufficient credit history can have a negative effect on your score. Also, don’t open up new accounts rapidly, as this decreases the average age of your credit accounts, and it is considered risky behavior in most credit scoring models. It’s good to keep and occasionally use old credit cards to maintain a good score.
4. Avoid recent credit applications. (10%). Every time someone makes an inquiry into your credit, as when you open a new account, it negatively affects your score. (It doesn’t affect it if you look into your own credit.) You should always read the fine print in ‘special’ credit offers, and if you have any question about the legitimacy, don’t accept it. These solicitations are treated as ‘soft’ inquiries, which don’t affect your score; but when you accept the offer, it is treated as a ‘hard’ inquiry that is factored into the score. Definitely, don’t apply for a card you don’t think you are likely to get.
5. Manage the number and types of accounts you have. (10%) Someone who has a lot of credit accounts could possibly be considered a higher risk than someone who has only some credit card debt. The trick is to manage it wisely. Too many credit accounts can have a negative affect on your score. The ideal number of credit cards is usually considered to be 3 to 5. If you have an unreasonable amount of credit cards, you may want to consider closing some… but do it wisely. You could affect the ratio between credit limit and available credit previously mentioned that will reduce your score. You could also negatively affect the length of credit by closing older accounts.
Generallly, a mix of credit cards, retail accounts, installment loans and mortgage loans results in a better score, but all are not necessary. The lack of a mortgage, for instance, won’t negatively affect your score, but it will probably not be as high as it could be with one. You should not go out and open accounts that you don’t have in an effort to increase the types of accounts.
There is Hope. If you have less than desirable credit scores, don’t lose hope, there are definite things you can do to enhance your credit scores. If you start practicing these good credit management tips now, you’ll most likely be in much better shape in 6 months, which is really not a long time.