Ways to Improve your Credit Rating

What Is Your Credit Score?

Your credit score is a numeric guide that shows lenders what your future risk is if they give you a loan. It is based only on the information contained in your credit report. In evaluating your credit application, lenders may use only the credit score, a combination of the credit score and your credit application, or their own proprietary scoring system that may combine each of these ingredients.

Your credit score is based on the following variables: payment history, amount owed on accounts, length of credit history, the nature of any new credit, and types of credit you’re using. I don’t know exactly in what percentage these areas have importance, but I can tell you that more than half of the credit score is based on payment history and amount owed.

 

How Do You Improve Your Credit Score?

1. Focus On Your Payment History

The more payments that you pay on time, the higher your credit score will climb. If you’ve been turned down for a bad credit auto loan because of your credit score, you probably have had several late payments. One or two tardy payments won’t kill your score. However, if you’ve been excessively late your score is probably pretty low. Get yourself back on track right away. Six months to a year of good payments can do wonders for your score.

2. Pay off Collection Accounts

You can’t remove a collection account by paying it, but paying them off can improve your score. It doesn’t hurt to ask the creditor to remove the account when you pay it off, but don’t expect them to do that.  Many mortgage companies will insist that you pay off collection accounts before giving you a home loan.

3. Focus On the Amount You Owe

If you’re carrying high balances on your accounts, your credit score may suffer. Being close to your credit limit on your credit cards may show that you’re overextended, and your credit score will suffer as a result. If you can, pay off your cards, or at least get the balances down. When your credit report updates with lower balances your score may be able to raise your credit score fast.

Having said this, carrying small balances on your cards that you have managed to pay on time is much better than carrying no balance at all. 

Also, pay off your debt instead of just moving it around. Shifting balances from one card to another does not qualify as paying off your balances.

4. Avoid Taking On New Debt

Although it matters less than your payment history, taking on new debt may affect your score. People who open several new credit accounts at the same time may seem to be a greater risk than those who are lowering their current debt.

If you’re looking to purchase a new or used car or a home, don’t drag out you shopping activity over months. Having your credit pulled by several companies over the course of a year or so looks like a much higher risk than having this done in a shorter period.  Instead, do your rate shopping in a shorter period.

Opening up a handful of credit cards, for example, may lower your credit score. Some people do this to increase the level of available credit. You are usually better off applying for credit as you need it. If you really don’t need a new credit card, just don’t apply for it. Especially if you’re trying to improve your score.

5. If You Are Trying to Repair Your Credit After a Bankruptcy or Other Credit Crisis

If you are trying to repair your credit score then opening up a new credit care account may make sense. In that case, you should open a new account so that you can begin to establish a good payment history. If, for example, you are coming out of a bankruptcy, we would recommend that you start with a credit card or small installment account and begin to make payments over time. Just remember, as you build your credit and more credit becomes available, don’t apply for it unless you really need it.

6. Limit Your Credit Inquiries

Every time a merchant or lender pulls your credit in order to evaluate a credit application submitted by you, your score will be dropped slightly. This shouldn’t present any problems for you or the lender. However, numerous inquiries that include several different attempts to get credit can lower your score drastically. Multiple inquiries, for example more than ten in a short amount of time, can signal a higher risk of bankruptcy. The credit reporting agencies can distinguish between normal “rate shopping” and someone looking to max out their credit irrationally.

7. Pull Your Own Credit Every Six Months

Pulling your own credit using any of the reporting agencies or other services does not lower your score. Each of the reporting agencies do not drop your score for checking your own history. Also, any time your credit is pulled as a part of a promotional event or item (for example an unsolicited credit card offer), you will not be penalized for that inquiry.

At least every six months you should pull your credit history to check for mistakes or any kind of identity theft or fraud.  Correcting mistakes in your credit report can take time.  Don’t wait until you’re at the car dealership to hear that someone has opened a credit card in your name and wrecked your score.  This isn’t common, but it happens more than you may think.

This wasn’t an all inclusive list of ways to improve your credit score. Your credit score is based on several factors, not all of them available to the public. However, sticking to basics like making your payments on time, applying for credit only when you need it and not having excessive inquiries should go a long way towards improving your score over time.