Improve Your Credit Score
Your credit score — a three digit number that is a product of a mathematical formula that evaluates the information in your credit report files — is designed to give an indication of how likely you are to make payments on time and use credit responsibly.
It’s also used by lenders to determine whether they will approve your loan and the interest rate they will charge you. Car insurance companies use it to decide if they will insure you and what they will charge you. Cell phone companies use it to approve an application for a new account, landlords use it when determining if they will rent an apartment to a prospective tenant, and employers will use it in their background checks before they decide whether to hire you.
If you have a low credit score, you need to know before they do, and take steps to take to improve it.
[...]
Credit Score Makeup
To know what you can do to improve your credit score, you first need to know the categories of information and their importance in determining your score. Basically. two things account for two-thirds of your credit score:
- 35 percent Payment History: Having a long history making of payments on time on all types of credit accounts is one of the most important items lenders look for.
- 30 percent Credit Usage: This measures the amount you owe versus the total amount of credit available. Your credit score can be lowered when you use more than 50 percent of your available credit for each account. That’s because a person close to maxing out all their credit limits is seen to be a higher risk for making late payments in the future.
Three other factors account for the other third element:
- 15 percent Length of Credit History: In general, a credit report containing a list of accounts opened for at least 10 years or more will help your credit score. The score considers your oldest active account and the average age of all accounts.
- 10 percent New Credit: Opening several new credit accounts in a short period can lower your credit score. Also, multiple credit report inquiries can represent a greater risk, but this does NOT include any requests made by you, an employer, or by a lender who does so when “pre-screening” or “pre-approving” you. Also, multiple inquiries by automobile and mortgage lenders over a 30-day period count as just one inquiry, so shopping the lenders to get the best rate should not hurt your score.
- 10 percent Types of Credit in Use: Your mix of credit cards, retail accounts, finance company loans and mortgage loans is considered.
Your credit score ignores your age, salary and occupation. It also does not take into account financial gifts, support you receive, or your financial assets. For this reason, credit scores are less important for borrowers who seek loans that take those factors into account.
Boosting Your Score
[I]t’s a given that having a long history of making all payments on time at all times is the key to a good credit history. But, if you haven’t done this and have some negative information on your credit report, don’t give up. There are steps you can take that can hike your credit score. Some of these steps can increase your score by 20 points or more in one month, and you don’t need to hire a professional to do it:
- Pay Recent Past-Dues: The first thing to do is to pay the past due payments on the accounts that recently fell a month or two behind. That’s because the more recent the late payment, the more it will lower your score.
- Request Good Faith Adjustment: After bringing past due accounts current, contact the creditors who report late payments on your credit report and ask them to make a good faith adjustment to remove the late payment information from your credit report files. Not all creditors will do this but, if you ask politely and remind them that you will continue to be a good customer, you may find a few that will work with you.
- Pay Collections that Vanish: Pay off accounts in which the collection agencies agree to remove all references to the accounts from the credit bureau files. Make this a requirement of your offer to pay off the account.
- Spread Out Debt: Evenly spread your debt balances over your cards with the lowest interest rates and the highest credit limits. The objective is to have not more than 50 percent of the credit limit used on any one card. That’s because having one credit account nearly maxed out can severely reduce your credit score. You can also ask the creditors to increase your credit limits on your accounts; that may help, as well.
- Report Credit Limits: Some of your credit accounts may not report the credit limit to the credit bureaus. This reduces your score because, when that information is missing, the score counts the account as being maxed out. Ask the creditor to provide this information to the credit bureaus. If they refuse, transfer the account balance to another account that reports credit limits and ask them to increase the credit limits.
- Keep the Right Credit: Major bank credit cards, held for a long time, with good payment histories help boost your credit score. Also, don’t close down your cards that have the longest history and the highest credit limits available — these help boost your score. Instead, close down those department store charge cards: Revolving department store cards have the lowest credit limits and, when used, will have a higher debt-to-limit ratio, which detracts from your score.
- Limit new Credit Accounts: Many people open new department store credit accounts during holiday shopping seasons, lured by offers for an additional 10 percent off. Just be aware that opening these new credit accounts hurts your credit score two ways: It raises your debt usage and lowers your average credit account age. After you use the card to get the discounts, promptly pay these off and close them.
- Excerpted from CBS News, Aug. 15, 2007
Sphere: Related Content