How Do I Improve My Credit Score?

How to improve a credit score? Pay your bills on time and keep your credit card balances low!

Ok, be back tomorrow.





If it were only that simple......... Actually, that's pretty close.

Although I do not have the time or energy to go through every way to improve your score, I will discuss several easy fixes and a few that are very important.

A little background. A credit "score" is a number assigned to your report at exactly the time you request the report. Think of it as a snapshot, because that's all it is. It can change subtly even throughout the day. It is a quick and easy way for creditors to size you up and see how well they can anticipate that you will pay your debts. In this case, they really do use past performance to predict future events.

Your report is "graded" in five areas. If you understand how it is graded, you may start to see what you can do to improve. The areas are as follows with the percentage of weight they hold in the overall scoring.

• 35% - Payment history. Do you make your payments on time? Ideally there would be no late payments. If there are lates, a 30 day is better to have than a 60 day or a 90 day or a 120 day or a charge off or a repossession or a foreclosure, in that order. Hence, if you are short on cash, always pay your mortgage then installment loans (auto loans) and then credit cards. A mortgage late is much worse than a late on a credit card.

• 30% - Balances or amount owed. Because the bureaus do not know your income, they don't know how much is too much debt. What they look at is the current balance versus the credit limit. For instance, if you have several cards with an $8,000 balance and combined $10,000 limit, you are at 80% utilization. There are several "levels" when your score is concerned, but below 15% utilization gives you the best score. While you can achieve this by paying your cards down, in a pinch you can also request a limit increase (don't start charging again...).

• 15% - length of credit history. This is why most people with 800+ scores are older. They have had the same credit cards for years and years and that helps bring the "average length of credit" up. The lesson here is to not close credit card accounts that you have had for several years, as your score may drop. Your best bet is to use them and then pay them off every few months to keep them reporting (keeping your balance low or zero). This is why your scores go down when you pay off your car (low balance vs. limit and many months reporting) and buy a new one (high balance vs. limit and few months reporting). You can "piggy-back" as an "authorized user" on someone elses accounts for now, but that option will soon end, so there is no reason to discuss it further.

• 10% - Types of credit. You will have a better score with a variety of credit types. Allegedly the scoring model likes to see one mortgage, one to two installment loans (auto or personal where you pay the same amount each month) and two to three revolving accounts (credit cards where payment is based on % of balance). While I have not found these numbers particularly true, the variety is positive. Also, "allegedly" the bureaus look at the type of cards you carry. An American Express is better than a card usually reserved for poor credit borrowers or a "store" card such as Sears or Penneys, etc. The same is true for the "I'm desperate for a personal loan" shops also, as they tend to cater to less credit- worthy borrowers.

• 10% - Inquiries. Suffice it to say that the scores take into account the number of inquiries to see if you are "desperate" for credit. In other words, do not apply for a bunch of credit cards unless you do it at the exact same time (and expect you score to get hit hard). Fortunately, the scoring system takes into account that you may shop for a mortgage, so multiple credit pulls in a several week period only count for one inquiry. Multiple pulls for an auto loan over about a one week period only counts as one. EACH inquiry for CREDIT CARDS counts as one! While they show up on your credit report for two years, they only affect it for about the first three to six months. Now the really good news.... when you pull your own report through annualcreditreport.com or another similar company, it does not hurt your score. This is called a "soft" inquiry, much like when credit card or other companies check your credit to send you those pre-approved offers in the mail. By the way, to stop receiving those, go to www.optoutprescreen.com and follow the directions.

I hope this helps a little. Next I will give you some suggestions of what NOT TO DO that could hurt your credit. You may be very surprised!

Scott

Scott Swinford is an Executive Consultant for the US Consumer Credit Restoration Association and a Certified Mortgage Planning Specialist in Northwest Indiana. If you have any questions, you can send email to scott@USCCRAonline.com.