HOW TO IMPROVE CREDIT
Just like anything else in life, credit is a Catch-22. Huh? Yeah that’s right, if you have bad credit you end up paying more in interest on auto loans, home loans, credit cards and more. This makes it more challenging to make payments on time, get out of debt and ultimately improve your credit score. But if you have good credit, you pay less in interest rates, get offered the better credit products and typically have an easier time maintaining a good to great credit score. The truth is, what your credit score today doesn’t matter because you can achieve the pinnacle standard of credit–a score above 800–and catch the best deals on some of life’s largest purchases.
As your average 30+ year old, I’ve struggled to pay bills on time, I have had too much debt and never had an above average income to help bail me out. But the one thing I do have, at least for now, is a credit score of 802 and below are the helpful secrets that I learned along the way:
STOP MISSING PAYMENTS
Saying that you have never had a payment reported as late is crucial to your credit score. Payment history makes up for about one third of your credit rating. If you have a good credit score and miss just one payment, your credit score could suffer a drop of 100 points or more. Debt settlement, foreclosures, bankruptcy and late payments are all events that negatively affect your credit score.
“30-day late” is any payment received one to thirty days after the due date, according to FICO. However, in many cases, your bank or lender will give you a grace period from a few days after your due date to a few days before your next due date before reporting a late payment to credit bureaus. Ask them now what your grace period is so you don’t find yourself in a credit crisis.
KEEP YOUR BALANCES LOW IN RELATION TO YOUR CREDIT LIMIT
Another good chunk of your credit score is determined by your credit utilization, or how much credit you use compared to how much credit is available to you – the lower, the better. A good rule of thumb is to keep your balances well below 50 percent of your limits. As soon as you hit the 50 percent mark, your score will begin to take incremental hits. On the other hand, the lower you keep your balances below that 50 percent mark, the more your credit score will incrementally benefit.
As a point of reference, the average credit utilization of a person with an 800+ score is 7 percent, according to FICO. Mine averages out to 2 percent, depending on when I pull my credit, as I ordinarily pay off my balances in full each month.
If you’re doing all that you can to keep your balances low, try your hand at the other side of the equation – your credit limits. This can be tricky, as the recession prompted many creditors to not only deny credit limit increases more often, but actually lower your credit limit based on the credit review they do on you. My advice would be to only ask for a credit limit increase if your credit card is in good standing and you have the income to support the possibility of greater debt.
DIVERSIFY THE TYPES OF CREDIT YOU HAVE
Another ingredient to the 800+ credit score recipe is a good mix of credit—revolving credit (e.g. credit cards), installment credit (e.g. car loans, student loans) and mortgages. Now, I would never recommend that you apply for credit you don’t need, but be aware that the ability to manage different types of credit responsibly bodes well for your credit score.
If you only have credit cards and are eager to mix it up, consider talking to your bank about a savings- or CD-secured loan. This is a type of personal loan in which the money in your savings account or CD is used as collateral in case you default on the loan. This loan typically qualifies as an “installment loan,” like car loans and student loans, and may help you break out of the credit card-only slump. If you go this route, make sure your bank will report your payment activity to the credit bureaus, so your timely payments will help your credit score.
APPLY FOR CREDIT ONLY WHEN YOU REALLY NEED IT
While applying for credit isn’t necessarily a bad thing, applying too often suggests that you are credit dependent and can have an adverse impact on your credit scores. Each time you apply for credit a new hard inquiry appears on your credit report cards. Hard inquiries are the type that can have an adverse impact on your credit scores. Note: I used the word “can” instead of “will,” as inquiries don’t always lower your credit scores.
DO NOT…CLOSE ALL OF YOUR UN– USED CREDIT CARDS
Closing an unused credit card can, in fact, lower your credit scores. The reason it can lower your scores is due to the loss of the unused credit limit. As explained in number two above, having low balances relative to your credit limits is helpful to your scores. If you close accounts that you no longer use, then you’re no longer getting the benefit of the unused credit limit associated with that account.
Note: There are some people that will suggest that closing credit cards can lower your scores because you don’t get the benefit of the age of the card any longer. That’s simply not true. Closed accounts still appear on your credit reports and you do still get the value of the card’s age. In fact, closed cards continue to age.
NEVER CO-SIGN FOR LOANS…NEVER EVER!
If someone asks you to co-sign for a loan it’s likely because a bank has denied their credit application. Asking for a co-signer is their way of making the bank more comfortable because they’ll now have someone who is actually creditworthy on the hook for payment. You co-signing for a loan is really no different than you applying for the loan on your own. Not only will the debt show up on your credit reports but any mismanagement of the account will also blow back on your credit scores.
Still have questions about how to improve credit? We have answers. Contact us today. A licensed loan officer can help you to understand all your options and will walk you through the financing process from start to finish.