I recently checked my credit rating with AnnualCreditReport.com, and found that I have improved my credit score by 237 points without actively trying to do so! How did I do it? Read on….
As I said, I wasn’t really trying to improve my credit score by any set amount. I just knew that my credit was lousy and we’d need to borrow money for a bigger house at some point down the line, so I should probably pay off some debts and get my financial house in order, so to speak. Looking back on it now, with my credit reports from the 3 major bureaus as data, I can see at least 5 things that have helped me increase my credit rating and could likely improve it even further if I continue.
These are not exotic solutions and probably aren’t all that shocking when it comes down to it, but they may not be things you are consciously aware of, and a little bit of knowledge can go a long way toward improving your situation.
1. Pay Your Bills On Time.
OK, this really is a no-brainer, but it bears repeating. Many credit bureaus consider any late payments in past 48 months as derogatory or adverse. Of course the more past due you are, the more adversely it will affect your rating. But the point to take away here is that you’ll be paying for that late payment for up to 4 years (maybe more).
2. Don’t Avoid Credit Entirely.
Many people think that never using a credit card, or never taking out a car loan is good for their credit rating. While this may be rooted in a financially sound approach to debt, it’s actually counterproductive in terms of building your credit rating. The reason is simple. Lenders prefer to lend money to someone they know will pay them back, consistently and on time. If you’ve never taken out a loan or don’t use a credit card then you simply have no history of being a consistently repaying a loan or being a good borrower. I’m not recommending you go out and buying a lot of things you can’t afford, but buying things you can afford with credit and paying them off on time and in full is beneficial.
3. Pay Down Your Mortgage.
Paying down the balances on your real estate accounts can have a positive impact on your credit score. It’s actually the ratio of original loan amount to the remaining balance that matters most here. The faster you can pay down that loan, better your credit rating.
4. Increase Your Available Credit.
This is the companion to paying down your mortgage. The greater the gap between what you owe and the maximum you can borrow, the better your credit score will be.
This goes back to the concept of your credit history. Having low available credit amounts doesn’t show that you have a history of being responsible with debt.
5. Have More Than One Credit Card.
Having multiple credit card accounts is beneficial to your score, assuming that you don’t carry large balances on them. Of course, as with most things in life, you can over do it. You should stay away from store cards (J.C. Penny’s, Sears, Macy’s Home depot, etc.) as they usually start in the 20% range for interest rate. There’s no hard fast rule as to how many is too many, but most calculators I’ve seen lead me to believe that something in the 2 – 4 card range is optimal. More than 5 and you’re setting red flags. Less than 2 and you’re probably neutral.
BONUS TIPS:
* Don’t apply for more than 1 credit card or loan per year.
If you apply for new credit cards or loans in general (car loan, mortgage, personal loan) try not to apply for more than 1 per year, as more often than that can affect your credit score in a negative way. Also avoid opening a new credit card account within 6 months of applying for any kind of loan, as a recent credit acquisition will also have a negative effect.
* Don’t carry a balance on more than 4 of your loans or credit cards.
Taking # 2 and 3 into account from above, you should really aim to have High credit limits, but only have a balance on 1 or 2 at any given time.
* Avoid bankruptcy, tax liens, foreclosure, repossession, or accounts referred to collection agency. These black marks will remain on your record for 10 years!
THE IMPORTANCE OF HAVING A GOOD CREDIT SCORE
Ok, so that covers the how but some of you may be wondering why. You may be asking yourself, “Why bother living my life as though someone is watching over my shoulder night and day. I don’t need that kind of paranoia. Besides, all that disciplined spending is too much of a hassle. I’ve never had a problem getting a credit card or a car loan.”
I had the same mind set myself.
And then I started educating myself about credit scores and interest rates. Consider the following.
The higher your credit score, you the less you will pay for loans. This is true whether you’re getting a home loan, a car loan, a credit card – even a cell phone!
Let’s compare 2 prospective borrowers looking to get a $150,000 30-year, fixed-rate mortgage. At current rates, a person with a credit score of 760 or above would pay $381 less per month than a person with a credit score below 620. That adds up to $4,572 per year that the borrower with the 760 score would save on interest payments! That is why it is so important to increase your credit score and keep it as high as humanly possible.
Here’s a chart from Bankrate.com, to help illustrate the importance:
| Your FICO® Score | Your interest rate | Your monthly payment | |||||
| 760 – 850 | 5.25% | $829 | |||||
| 700 – 759 | 5.48% | $849 | |||||
| 680 – 699 | 5.65% | $866 | |||||
| 660 – 679 | 5.87% | $886 | |||||
| 640 – 659 | 6.30% | $928 | |||||
| 620 – 639 | 6.84% | $982 |
If you’re interested in getting a handle on your credit score, you can perform a free credit score check once a year at www.AnnualCreditReport.com. This is what I did. I wrote about the experience at the post titled REVIEW: ANNUAL CREDIT REPORT.COM. You can all 3 credit scores from the main bureaus for free – without signing up for any monitoring programs!
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