Credit scores are intended to help lenders assess your financial standing and how likely you are to repay debts. The number represents an analysis of your payment history, the amount of debt you owe, how long you have had a credit account, how many credit accounts you have and the types, and how often you seek new credit. These factors combined summarize for lenders your credit report and as a result credit scores are used to decide whether or not lenders will grant you credit and on what terms. Scores in upwards of 700 will be granted the most favorable terms but most of us don’t have scores in this range. So how do we get there?
Pay your bills on time! In the FICO scoring system the most significant factor is your payment history. This is because what lenders want to know is what the likelihood is of you repaying the loan. If you avoid making late payments, missing payments and having them referred to collection agencies then your score will start to look better. Declaring bankruptcy will also have a negative effect on your credit scores.
Manage your debt properly. Avoid spending up to the limit on your credit cards. FICO scores also take into account the debt you have as a percentage of the credit you are granted; the higher that percentage the lower your score. It won’t matter if you pay your balances in full each month. Instead of asking lenders to lower your credit limit which may in turn lower your credit score, try spending no more than 30% of your limit on a card each month. This will do wonders for your credit score. Handling all forms of credit responsibly will improve your score. Paying off revolving debts such as credit cards is equally as important as making timely installment payments such as mortgages.
Don’t close unused or old accounts. The length of your credit history is also a factor which may increase your score. By closing old accounts you have less time on your history and this may harm your score. Also, when you close accounts the debt to credit ratio becomes less favourable and you appear to be closer to reaching your maximum credit limit. Lenders like to see time which signifies some stability and a large gap between the debt you owe and the credit granted as a sign of responsibility.
Improving your credit score is really about having a plan, patience, and discipline. Pull your credit scores, find out where you stand and make the effort to get to where you want to be.