How To Improve Your Credit Score
Any time you check your credit score it’s like getting a snapshot at a particular time, when really, your score fluctuates up and down, based on your credit patterns. Most of the time, however, a credit score doesn’t change very much from month to month. Understanding what goes into a credit report will help you learn how to improve your credit score.
It’s a good idea to check your credit score periodically, about twice a year, and about 6 months before you buy a home. (You can get one free credit report per year from the top three, Experian, TransUnion, and Equifax.) Then if you find that your score needs improvement, you can take steps to improve your score, what is known as Credit Score Enhancement. By taking the correct steps, you can improve your credit score in 6 months.
Knowing How Your Score Works
Although credit scoring models differ among various credit scoring companies, they all break down to a basic formula:
1. 35% of your score is made up of your payment history.
2. 30% is made up of the amount owed.
3. 15% is made up of the length of credit history.
4. 10% is made up of new credit.
5. 10% is made up of the types of credit used.
Credit Score Enhancement
1. Pay your bills on time. 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, (it will stay on the report for 7 years) and late payments involving smaller amounts are not as significant as those with larger amounts. Managing your credit well over a period of time is the best thing you can do.
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. If you are considering buying a home in the next 6 months, avoid applying for new credit. 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.
*When you are applying for a loan, the credit scoring companies generally allow multiple inquiries in a 14-day period. Inquiries from employers are not counted. Most of the time, for most people, one credit inquiry will result in less than five points being deducted from the score.
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.
Good Credit can be 6 months away. If you have less than desirable credit scores, don’t lose hope, there are definite things you can do to enhance your credit scores. You can learn how to improve your credit score and keep it in good shape. 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.
If you need extra help for Credit Repair, contact us for a referral to a reputable credit repair specialist.
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