Your credit score is an important factor when it comes to obtaining lower interest rates on loans or new credit cards. Ones credit score and income are two key factors banks take into consideration when deciding on credit limit, loan amount and interest rate.
This post focuses on different actions one can take to raise their credit score. However, before I begin I wanted to mention (and I only say this because there seems to be a bit of a misconception when it comes to credit score and income) that the amount of money you make / income and your type of employment (if any) have nothing to do with your credit score. You can have a high credit score with no income or have a low credit score while making a substantial amount of money. And also that this post is probably geared more towards people just starting to build credit (and may or may not have a full understand of how ones credit score is compiled) or those who have made mistakes with their credit in the past.
There are three main independent credit bureau’s / agencies responsible for determining ones credit score: Experian, Trans Union and Equifax. They take a number of factors including but not limited to available credit, payment history, number of credit accounts and types of credit accounts and enter those factors into a formula to come up with ones credit score. Each of the three credit agencies will provide you their own credit score. There is also a fourth credit score called a FICO (Fair, Isaac, and Company) credit score. In short it is a score based on all three reporting agencies. Banks use your FICO credit score as one deciding factor when determining if someone is eligible for a mortgage.
I feel available credit is the most important factor (other than of course paying your credit cards and loans on time) in obtaining a higher credit score. Available credit is simply the amount of credit you have available for use. For example: Lets say you have one credit card with a $1,000 credit limit. Then you use $900 to buy a television; your credit score will be impacted negatively as your available credit will drop from $1,000 to $100. Now lets say you pay off that $900 the following month; your credit score will go up. And it will probably go up significantly because you’ll have much more credit available (low use rate).
One way to build up available credit is through secured credit cards. Secured credit cards allow you to deposit your own money into the secured credit card account. These deposited funds will show as available credit as long as the credit card is not used or barely used. If you decide to go the route of a secured credit card, beware that many charge highish annual fees and often come with high interest rates. It is also important to choose a secured credit card that reports to all three credit agencies. I only say this because there are secured credit cards that don’t report to any of the three credit agencies.
Use Of Credit
How often one uses their credit is another strong factor in the determination of a credit score. For example: Lets say you have three credit cards and charge $50 on each one. Then pay off the amounts when you receive your bill – your credit score should go up. This is because every time you make a payment it will have a positive impact on your score. So in summary, if you already have a credit card and want your credit score to go up, try charging a small amount every month. Then pay it off once you receive your bill.
Diversification Of Credit Accounts
Credit Bureau’s look favorably upon diversification of credit accounts. Individuals with a portfolio containing a mix of credit card(s), auto loan(s), student loan(s), personal loan(s) and mortgage(s) will usually have a higher score than an individual with just credit card(s) on their portfolio.
Free Credit Report
Everyone is given the opportunity to obtain one free credit report per year from each of the three Credit Bureau’s. Even though these reports do not list your credit score it is a good idea to get a copy from all three agencies for review. There may be an instance where you see a mistake in the reporting of one of your accounts, which affects your score negatively. If this is the case you can request the mistake be corrected. Once corrected you should notice a positive impact on your score. You can obtain all three free credit reports through www.annualcreditreport.com.
Pitfalls To Avoid
– Having to many credit cards or credit accounts on your portfolio. In general it is probably not a good idea to have more than four or five credit cards on your credit portfolio.
– Applying for to many credit / loan accounts will also have a negative effect on your credit score. Every time you apply for a credit / loan account (regardless of whether you get the account or not) your credit score will take a hit.
– Making late payments. This one is pretty obvious, but I had to include it anyways. Making a late payment is basically like taking a hammer and slamming it into your foot. It’s an unnecessary self inflicted hit to your credit score.
If you follow these steps it shouldn’t take long before you notice a jump in your credit score – depending of course on your current credit situation. Once your accounts are under control and your credit score higher, try to keep them that way as the longevity of credit accounts is also a benefit. And your newly-found higher credit score should help provide you more purchasing options at lower rates.
* Disclaimer – The idea of this post is intended to try and help people obtain a higher credit score. However, there is no guarantee that if these steps are followed your credit score will be impacted positively or won’t be impacted negatively. It is merely a list of suggestions based on information acquired over the years that in theory should help obtain a higher credit score.