How to Improve Your Credit
For any loan application, your credit gets the most important consideration. The better your credit, the higher your chances of obtaining a loan on better terms. Most individuals think, however, that their credit standing is etched in stone and that it won’t improve no matter what. Well, think again. Consider taking the following steps to see improvements in your credit standing and your credit score.
Make payments on time
Most credit bureaus and lenders will take a very critical look at your payment history to determine risk associated with offering you a loan. Consider making regular, on-time payments to provide lenders with a reason to believe you are a responsible individual who can be trusted with their money. Of course, there are additional advantages to making timely payments — avoiding late fees, for instance.
Pay off as much as you can
The lower the amount of debt in proportion to your total available credit, the more attractive you will come across as a candidate for a loan. Try to pay off as much of your debt as you possibly can. This single step can have a serious impact on your credit standing and your credit score.
Credit experts recommend using less than 30% of your available credit to raise your score to its highest level. This means if you have three credit cards with a total credit limit of $2,000, you should only carry a balance of $600 or less. (600 is 30 percent of $2,000) Even if you charge more each month, find out when the cards report to the credit bureaus and pay them down to that level a week before that date. Credit utilization or the percentage of your available credit that you use accounts for 30 percent of your credit score.
Don’t close accounts
Many individuals believe they should close off old accounts (with zero balances). Some lenders may look at this negatively.
Here’s why. If you have a credit card account with a $1,000 credit limit and zero balance is $1,000 – and your credit utilization percent is zero. If you close the account, your available credit goes away – and can actually bring down your credit score. The only exception is if you have numerous cards (7 or more), then you may want to pay off and close the ones with the highest interest rates. Then, you can keep the ones with lowest interest rates. If necessary use the one with the lowest interest rate and pay off the balance each month. This keeps your credit rating at its peak.
Avoid too many inquiries within a short time
Every time you apply for credit, an inquiry is placed on your profile. Too many inquiries within a short period of time may create red flags so be careful to avoid applying for too many loans within a short period of time.
The exception is if you pull your credit report yourself. Personal credit pulls do not show up as hard inquiries, which count against you. Also, if you buy a house or a car and are shopping around the credit bureaus do not count that against you as long as the activity takes place over a short period of time, usually 30 days.
Once you take a loan, make timely payments and demonstrate to lenders that you are a responsible individual who repays loans on time and in compliance with agreed upon terms. This will have an important bearing not just on your relationship with the lender but on your credit profile as well.
In fact, paying your debts on time is the most important factor affecting your credit score. It accounts for 35% of your score. If you find yourself in a tight spot, it is best to pay the debts that report to the credit reporting agencies. These include credit cards, car loans, home mortgages, student loans, and any other personal loans, department or furniture store charge cards. Medical bills do not report unless your bill actually goes to collections. This typically occurs when the bill is six months late. Also, keep in mind that 30 days late is the key timeframe, as most credit cards and other lenders do not report your account late unless it hits that mark.
Check your credit profile periodically
It is imperative that you check your credit profile regularly. Fortunately, you can obtain a free annual credit report from the major credit bureaus. Regularly monitoring your credit will allow you to take corrective action should something go wrong.
You can go to www.annualcreditreport.com to access your free reports or visit the individual websites of each of the credit reporting agencies, Experian, Equifax, and Transunion. If you find any inaccuracies, the report will explain how to dispute it. Most disputes can be done online and can be resolved in 30 to 60 days. Once you submit your formal dispute, the credit reporting agency contacts the lender and if they are unable to disprove your claim, the inaccuracy drops from your report. This can take a cycle (30 days) or two to show up on your report.