Improving Your Credit Score
The first question most people ask when told about their credit score is: what is my credit score and why does it matter? The answer is that your credit score is a three-digit number that will determine the interest rate on your home or car mortgage. It is thus a very important number and can and should not be ignored! Every lender has a distinct set of rules that help determine the risk of each loan as well as its interest rate. Despite minor differences almost all lenders heavily emphasize your credit score as a determinant of your (current and potential future) financial condition and ability (and willingness) to repay their loan. Generally lenders offer the most favorable terms and lowest interest rates to people having credit scores of 700 and above. If however you have a credit score of 760 or above you will get the lowest possible interest rate and the most favorable terms possible. Consequently, even one point in your credit score can cost you thousands of dollars in terms of excess interest you will have to pay. This should make you well aware of the importance of your credit score. Also remember to shop around when looking for a mortgage.
Experts suggest numerous tactics that can help to improve your credit score and will help it stay healthy. The simplest suggestions given by most experts include paying your bill on time, keeping your account balances low and obtaining new credit only when you direly need it. People who follow these simple steps are reported to have consistently high credit scores. And higher your credit score lower will be the interest rate on your mortgage! Your should review your credit score at least six to seven months before you plan to start shopping for a home mortgage because this will give you time to smooth out potential mistakes that you might have made and boast your credit score to the desired level. There are a wide variety of credit scores available from various sources. Though most mortgage companies use credit scores provided by the three largest credit bureaus of the country viz. Equifax, Experian and TransUnion. The mostly commonly used credit scores are FICO scores. FICO scores are calculated from a scoring system developed by Fair, Isaac and Co. Weightages assigned to various factors in your FICO score are as follows:
- Type of credit you have utilized weighs 10 percent of your total credit score,
- New credit impacts your credit score to around 10 percent,
- Length of your credit history has a 15 percent impact on your credit score,
- Amounts you owe i.e. Balance to credit limit ratio contributes 30 percent to your total credit score and
- Payment history has a greater impact on your credit score since it has 35 percent weight.
We will now overview a number of steps you can take to review and improve your credit history:
- Review your credit report periodically to make sure you are aware of your credit score at all times. This awareness will help you to highlight the weaker points of your credit score and how you can improve it.
- Always pay your bills on time. Even one late payment can sabotage your credit score significantly.
- Do not open many new credit accounts. This is especially useful for people having a relatively shorter credit history. Shorter your credit history lesser accounts you should open to have an enviable credit score.
- If you have a poor credit score the best way to improve it is to open a few new credit accounts and pay them responsibly. This will definitely have a positive impact on your credit score.
- Never open credit accounts you do not intend to use. On the contrary if you have one or a few credit accounts that you don’t use it is always a good idea to close them at the first possible opportunity.
- A credit card or installment loan can have a healthy impact on your credit score as long as you don’t have an exorbitantly high credit balance and are prompt about your monthly payments.
- Paying off your credit card debt is always a better option than shifting it to lower interest credit cards. Try to pay off your outstanding balances as soon as possible.
- Most people pay sizeable amounts to Credit Repair Clinics to get negative credit deleted from their credit report when they can do it themselves. All you have to do is write a letter or email to the credit card company with proof of the error. Avoiding Credit Repair Clinics can save you hundreds of dollars and usually gets faster results.
- An easy option for improving your credit score is adding someone with an immaculate credit history to your credit account. All payments in their account will be reported in your credit score as well and help improve your credit score.
- Try to get different types of credit at the same time. The ability to handle multiple types of credit at the same time can have a very healthy impact on your credit score.
- Avoid bankruptcy and foreclosure to the maximum possible extent. These stay on your credit report for minimum 10 years and impact your credit score negatively. Older your bankruptcy or foreclosure gets faster you can rebuild your credit history. Contrary to the popular belief it is possible to delete these. Although difficult it is not impossible!
- Take all necessary steps to keep your credit score in check because negative items affect it more quickly than positive items i.e. it takes a longer time to improve your credit score than it does to lower or ruin it!
- Never hesitate to seek credit counseling if your credit situation is threatening to get out of control. Credit counseling services can be very helpful in negotiating lower interest rates of your outstanding debt and speeding your payback period.