How to Improve Your Credit Score
2007-10-03
Having a good credit score is typically one of the largest factors in determining if you can buy a home and how much it will cost you to buy the home of your dreams. Before you start trying to improve your credit score, it is important to know what a credit score is, how improving it can help you, and active steps you can take to improve your credit score.
A credit score is a numerical assessment of your risk to a credit agency. Given the standard methodology and formulas used to compute credit scores, this number is generally accepted as a way to assess risk when borrowing money or applying for a credit card. Mortgage and loan companies use your credit score to determine how much risk they are taking on when lending you money. Your score influences many loan factors, such as the maximum size of your loan, the loan’s interest rate, the loan fees you pay, and the size of the down payment required. The three major credit agencies are Equifax, Esperian, and Trans Union Corporation. Although they each have slight differences in their credit score calculation methods, a credit score from any one of these agencies is widely accepted. Typically, a credit score above 700 is considered good.
Having a good credit score can be the difference between getting approved or rejected for a loan. A good credit score can also save you thousands of dollars through lower interest rates, reduced fees, and fewer points. A good credit score can be the difference between walking away from the home of your dreams vs. moving into the home of your dreams. Now that you know the importance of having a good credit score, you are probably asking yourself, “How can I improve my credit score?”
A credit score is typically influenced by four primary factors: payment history, financial accounts, total debt, and recent credit score inquiries. Note demographic factors such as gender, race, and religion are illegal by law to consider. Payment history influences your credit score based on the number of late payments as well as their severity. The more frequent and larger your late payments are, the more your credit score is negatively impacted. Pay bills on time, and you’ll help your credit score. Another influencing factor is the type, age, and number of financial accounts you have. If you can show that you are able to manage credit cards with large credit lines, this will positively impact your credit score. The longer you are able to show this type of positive behavior, the better your score will be. Next is your total debt. The more rotating debt you have such as credit card debt, the lower your credit score will be. A large amount of rotating debt indicates you may not be able to handle your finances well. Alternatively, debt such as a home or car you have been paying off on time will positively impact your credit score as it shows you are able to handle large financial commitments. Pay off those credit card debts – you’ll reduce your interest payments and improve your credit score. Finally, the last major influencing factor is recent inquiries to your credit score. Although this does not influence your credit score quite as much as some of the factors described above, it does play a role. The most common causes of credit inquiries are applying for loans, getting pre-approval for loans, applying for credit cards, and checking your own credit. Eliminate frequent credit card applications, and this will help your credit score.
It’s important to know your credit score is a fluctuating number, and changes in your habits can improve (or ruin) your score. The best thing is that it is never too late to start taking steps to improve your credit score.