When you're sitting in the office of a mortgage lender or discussing with the local auto dealer the prospect of financing a new car, the words "We'll need to do a credit check" can either inspire you with confidence or leave you with sweaty palms, a racing heartbeat, and a knotted-up stomach.
Calling up your credit score can have many ramifications.
When you're financing a large purchase, when you are setting up installment payments, or when you are trying to apply for a credit card, line of credit or another retail credit card, your credit score and history will be strongly considered.
A low score will make it more difficult to qualify for the size of loan you desire and will make the terms and rates more stringent and less in your favor. On the other hand, if you have a higher credit score, your worries and fears can be minimized, as your chances of securing the loan you want are greatly enhanced.
If you currently have a less-than-ideal credit score, all hope is not lost. Rest assured that it is possible to raise your score and improve it. All that is needed is a little time, discipline, and hard work.
Here are a few specific ways in which you can raise and improve your credit score:
It may seem obvious, but this practice is critically important if you wish to keep your score on the high side or raise it up. If you do make your credit card, installment, auto loan, and mortgage payments on time, continue to do so. If you have struggled in the past with making your payments by the due date, make the commitment and the necessary changes in your finances and spending habits to ensure that you make the payments on or before the monthly due date. Late or missed payments will not only incur late fees, but they will negatively impact your score. When it comes to mortgage loans, payments more than 30 days late will cause a hit on your credit score.
Credit reporting agencies take into account a ratio between your current balances and the credit limit. Jeff Proctor, a personal finance writer over at DollarSprout.com, explains your credit utilization ratio "is how much credit you are using in relation to your maximum borrowing capability—and it’s the second most important factor in determining your credit score. In other words, if the maximum combined limit on all of your credit cards is $15,000 and you have $5,000 in credit card debt, your credit utilization ratio is 33%."
Proctor continues, "Ideally, your credit utilization ratio should remain below 30%, and lower is even better. By aggressively paying off your existing debts, you will not only improve your credit score, but you will improve your ultimate financial situation (which is more important than your score, anyway)."
Avoid closing credit card accounts, as that will lower your credit score. Nathan Grant, a Credit Industry Analyst with Credit Card Insider, suggests keeping credit card accounts open "even if you don’t use them and they are all paid off. The age of your accounts is another large factor in determining your credit score, so as long as you don’t have to pay an annual fee and you’re responsible enough to not rack up additional debt while keeping the card open," keep your credit card accounts open.
Grant also notes, "Keeping a card open that is carrying no balance has a two-fold benefit. In addition to aging your accounts, it will also widen the gap between your total balances and your total available credit."
Increasing your credit limit has the ability to improve your credit score if you keep your credit utilization ratio low and make your payments on time. Joseph Allen, VP Mortgage Lending Officer at Quontic, gives this advice when looking to increase your credit limit: "When increasing credit limit, it’s important to know that most creditors will only allow one increase per year. Many creditors do not require a credit check in order to approve a credit line increase, however, some do. The best time to request a credit line increase is when you have little to no balance on your credit card. If your card is maxed out, then denial is more likely."
You can request a credit report at no cost. The report will show all your current debts as well as any delinquencies or negative aspects of your credit. It's possible that some of these may be in error, so checking your reporting to find any inconsistencies or inaccuracies is vital.
It's not necessarily a bad thing to have a credit card, but you must be vigilant in using it wisely. Plan to use credit cards for emergencies only. Or, if you decide to use it for incidental purchases, be dedicated to paying off the balance each month.
You don't have to be the primary credit cardholder to get credit score benefits. Travis Holoway, CEO and co-founder of SoLo Funds, a mobile lending exchange connecting lenders and borrowers for the purpose of providing more affordable access to loans, recommends becoming an authorized user on a credit card. "This is an often overlooked non-traditional way to build credit but the major benefit is that a person with little or no credit can join ‘credit forces’ with someone that has more established credit. As payments are made to the credit card account, they will positively impact everyone associated and will help someone with no credit start to build indirectly."
If you can't keep to a budget and spend responsibly, your financial situation will likely suffer and as a result, so will your credit score. Healthy spending habits typically equate to a good credit score, so make budgeting a priority. Don't spend more than you can afford and save when possible.
Experienced in being frugal with her funds, Carol Gee explains an experience when she had to help repair her husband's credit after he wasn't budgeting correctly while overseas for the military. "He got behind on purchases I didn't know he had made, and his credit took a hit (I was the bill payer in our family). So when he returned and we received orders to a new base, I put a couple of our new utilities in his name and paid them on time monthly as usual. A year or so later when I checked both our credit scores, his was four points higher than mine."
Gee's experience demonstrates that even if there is a time when you aren't budgeting correctly, your credit score isn't ruined forever. Just be sure to change course as soon as possible and to get back on track with your bills, and your credit score will slowly improve.
Richard Best, a writer for dontpayfull.com (a savings, discount, and coupon aggregator that also provides tips and education for saving money and managing personal finances) with over 30 years of experience in financial services, echoes Carol's thoughts in noting that your payment history is one of the five most important factors that affect your credit score. Best explains that "payment history, which includes your on-time or delinquent payment record, accounts for 35 percent of your score."
Best also suggests what he calls 'credit house cleaning.' Best explains, "The vast majority of credit reports contain errors—misapplied payments, incorrect credit limits, even wrong Social Security numbers—which can drag histories of other people into your own. By law, the credit bureaus must correct errors." Best concluded by saying that if you catch these inaccuracies, that "you can see your score improve instantly."
If you are behind on payments or are having difficulty making ends meet, speak with your creditors. In some cases, the lenders may be willing to renegotiate the terms and rates of your loan, and they may be willing to set up a plan with you to help you meet your obligations. You may also receive education on how to better manage your money and how to set up a plan for getting back on track.
Your score will not automatically jump up to optimal levels, but abiding by these simple guidelines will improve your situation over time.
A credit score will plummet if you fail to pay debts by the due dates and if you open several different lines of credit and assume several forms of debt. Also, when your credit cards are maxed out, your score will fall as well.
*Josh McFadden also contributed to this piece.
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