6 Easy Steps To Increase Your Credit Score

As I discussed in my previous hub, What is my Credit Score, your credit score is very important in determining what kinds of loans, and what terms, banks will give you. Having a low credit score can make you pay thousands extra on your credit card bills, mortgage, and insurance. Low scores can even cost you your new job.

The best defense is to work on these 6 easy steps. Following these simple tips, you will increase your credit score over time. It can take a while to raise your credit score because many mistakes take up to 7 years to be removed from your records. Getting your credit report from annualcreditreport.com every four months is recommended to make sure the credit bureaus are tracking the correct information. Getting just one of your reports every four months from one of the bureaus ensures that you always have up to date information. This also helps in fighting identity theft because you will spot any suspicious activity before it can really do any harm to your credit score.

Fair Isaac and Company, FICO, do not publicly reveal the actual formulas they use to calculate your credit score. The following tips are based on observations from thousands of consumers and the recommendations of banking professionals and financial planners.

A large portion of your credit score is based on how well you pay your bills.  All most all of the businesses you get billed from report your payment history to one or more of the three credit bureaus.  Your utility provider, mortgage holder, and credit card issuers are some of the businesses that are most likely to report your payment history.  On almost all accounts, you have a small grace period to pay your bills after the actual due date.  For example, if you mortgage is due on the 15th of the month your statement will say that if it is paid by the 15th your mortgage will be $x, and $x+fee if you pay if before the 23rd of the month.  This grace period will be different by state and type of account, but as long as you pay your bill before the grace period passes, your credit history will not be dinged too badly.  You will have paid an extra fee but if this doesn’t happen very often you will not notice too large of a hit to your score.  Where you will see the largest drop in your credit score will be if you end up 30, 60 or more days overdue.  Creditors don’t like to lend money to anyone who doesn’t pay their bills on time.

It is believed that up to one third of your credit score is determined by your debt to loan ratio. This is the percentage of outstanding credit that you are using. For example, if you have a $10,000 credit limit on your credit card and have a balance of $1000, your debt to loan ratio is 10%. As long as your debt to credit ratio is below 30% on all of your accounts you will be in good shape. Anything over 50% will really start to lower your score.

Since your debt to loan ratio is so important to your credit score, you never want to close an account.  Let’s say that you have $3000 of credit card debt and two credit cards, each with a $5000 credit limit.  Your debt to loan ratio is 30% ($3000 / ($5000 + $5000)) which is in the good range.  If you transfer all of you balances to one card and close the other, your debt to loan ratio will be 60% ($3000 / $5000).  60% is above the magic 30% and even above the really bad 50%.  Closing the second card could lower your credit score by up to 100 points.  There is also a danger of the credit card company closing the account on you.  This is happening more often today because the banks are struggling with bad debt.  They are trying to lower the amount of money available for credit to increase the reserves required by the federal government.

When you apply for a loan, most lenders will do a credit check.  This means that they get your credit history from one or more of the credit bureaus.  The credit bureaus track every time your credit gets checked.  If you have several of these checks in a short period of time, your credit score will be lower.  Lenders see that you are trying to open more accounts and will have trouble truly evaluating your score because new accounts my take a few months to show up in your report.  Having a lot of credit checks will raise your risk to the lender which lowers your credit score.

The longer your credit history the better chance you will have of having a high credit score.  With a short credit history one late payment stands out much more.  With a long history you may have 1 out of 100 late payments, but with a short history it may be 1 out of 12.  This makes it very hard for the banks to judge your credit worthiness, so they will charge you higher rates or not give you the loan.  Some items, like a bankruptcy, stay on your credit report for up to 7 years.  If you file for bankruptcy, don’t plan on getting a good rate or even a loan for some time.

Your credit report also tracks what your minimum payment is and what you pay each month.  If you are always paying the minimum, you are not only wasting a lot of money on interest payments, but you are telling the banks that you may not have any extra money each month.  If you don’t have any extra money each month, how are you going to pay for your new loan?

The actual makeup of your credit score is very complicated and changes often.  Following these tips will help you stay above the curve and ensure that you always get the best offers from the banks.  As your score improves the banks will want to lend you money.  They do this by increasing your limits.  The lower rates you will pay on loans will help give you the extra money you need to fulfill your goals and dreams.  Not following these tips can cause you to be denied credit for a new car, house or credit card or make you pay more in interest than you should.  Remember these rules, don’t over extend yourself, save all that you can and your dreams will be within reach.