Improving Credit Scores

Your credit score is the single most important factor businesses consider when evaluating you for credit purposes. Employers and insurance companies are also interested in gaining insight to your financial solvency. Your credit score is instrumental in every credit decision as well as potential career opportunities, so it’s important to keep your credit in the best shape possible.

Your purchasing power and interest rates are driven by information found in your credit report. Data provided from your creditors produces a score ranging between 300-850. The higher the score, the better your rating. Many institutions won’t consider individuals with credit scores below 620, so it’s important to know what factors affect your score for better or worse.

There are three main credit bureaus analyzing and generating credit scores. Equifax, Trans Union and Experian all use software created by Fair Isaac Corporation (FICO) to produce credit reports. Calculations are derived from variables such as how many active accounts you have, how much you owe, if you pay your bills on time, etc. The combined factors are designed to weigh the risk against your likelihood of default in the future.

Since credit affects every aspect of your financial future, here are ten things you can do to improve your credit score:

1. Don’t Max Out – Pay down open balances as much as possible in order to reduce your total amount of debt. High balances cost you points. It’s best to keep your revolving and unsecured debt well below 50% of your limit. The lower the percentage you owe, the better.

2. Avoid Credit Lust – Limit credit inquiries. Although it’s good to shop for the best interest rates, be careful not to let everyone pull your credit. Every inquiry to open a new account drops your score a few points and credit inquiries can stay on your report for two years.

3. Balance Trade Lines – Avoid having too many of the same types of accounts open at once. Lenders look for variety in accounts such as mortgages, auto loans and revolving lines. If your report has ten open credit cards but nothing else, it will hurt your score. Try to balance secured and unsecured debt whenever possible.

4. Limit Opening/Closing Accounts – Closing an existing account can negatively affect your credit score even when you pay on time. Try to keep a few trade lines open with low to no balances, using infrequently rather than closing. Opening a new account also drops your score a few points, so forget it if you don’t really need it.

5. Pay On Time – When you pay a bill over 30 days late, your credit score plummets. A 30-day past-due mortgage payment can drop your score 50-100 points instantly. The only way to remedy a late payment is time. Your score will improve as you stay current, but skipping payments is the fastest way to lose valuable points.

6. Expunge Errors – Check your credit report annually for errors, don’t leave mistakes to chance. Erroneous activity can occur without your knowledge and identity theft can ruin your credit. The credit bureaus will work with you to remove mistakes, which will improve your score considerably.

7. Settle Collections – Paying off bad or aged debt can improve your credit score. Collection accounts, liens, charge-offs and old debt linger, wreaking havoc on your bottom line. Any effort you make to pay and remove old charges will greatly improve your score long-term.

8. Pay Down Monthly – The right kind of activity on your credit can be highly beneficial. Limiting the use of your credit cards by spending only what you can afford monthly, then paying the balance in full adds points. Inactive revolving accounts can be closed by the lender, so periodic use keeps them open and your score up.

9. Seek Professional Advice – If you need serious help consult a professional. Be careful to choose the right one, being mindful of potential scams. Credit counselors can help you devise a plan with long- and short-term goals.

10. Piggyback – If you have a spouse or family member with excellent credit. they might consider adding you to one of their accounts. This can help you improve your score by sharing trade lines that are in good standing with low balances. Their favorable history can be used to your advantage.

Improving your credit score isn’t easy and it takes time, but using the tips above should help you get you off to a good start.

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