After filing for bankruptcy several years back, I had to figure out what I needed to do to improve my credit score and have been diligently working toward this end ever since. Now, while still not perfect, my credit score has been improving ever since because I took the steps to learn about what I needed to do to improve it. In this article, I provide some of the steps I’ve taken and some of what I learned in my research to improve my own credit score.
Your credit score determines the amount of interest you will pay for credit cards or other loans. This includes loans such as car financing and mortgages. There are also non-interest types of costs your credit score can have on your life, such as the cost of insurance; your ability to rent an apartment or secure utilities without having a co-signer; and in some cases it can affect whether you will be selected for a job. Increasing your score by just few points will make a big difference in your life overall, but mainly in the interest rate you will pay for a purchase, especially important for those big purchases. A High credit score generally equates to getting the best loan rates and terms for car financing, mortgages, credit cards,
etc. You get the idea. However, a low credit score can have a negative effect even on some of the most basic necessities of life.
While how your credit score is calculated is not public knowledge as the exact formula has been kept a secret by Fair Isaac Corporation, there are some basic approximations to consider.
Here’s the basic breakdown:
1 - Paying your bills on time - about 35 percent of a credit score
2 - How much you owe - about 30 percent of your credit score
3 - Credit history - about 15 percent of your credit score
4 - New credit - about 10 percent of your credit score
5 - Types of credit - about 10 percent of your credit score
Here’s some information that can help you improve your credit score and in some cases help you identify whether or not you’ve been the target of identity theft:
Step One: Know what’s in your credit report
Your credit report is an important life document. When I first received mine, I was surprised at all the information it contained about my life and me. My entire life from the time I had turned eighteen to the present was contained within the report. Every place I had lived, worked and every loan I had taken out was contained within the report. Needless to say, if anyone else got a hold of my credit report, they would indeed have some valuable information.
Since your credit score is based on your credit report,
you need to begin by knowing what’s contained in the credit report and whether it’s accurate.
This is an easy step and you can even get your credit report for free. Under a new Federal law, you have the right to receive a free copy of your credit report once every 12 months from
each of the three nationwide consumer reporting agencies; Experian, Equifax and TransUnion. This can be done online or by phone. I suggest spacing out each credit report intermittently throughout the year so you can monitor any changes. Requesting your own credit report doesn’t negatively affect your credit score as long as you order from these companies rather than through a debt management counseling agency.
Step Two - Is your credit report accurate?
What else needs to be said?
Is your name right, your social security number, are there accounts that you didn’t open, anything negative that needs to be addressed, is there anything whatsoever that doesn’t fit? You need to make sure that everything on your credit report is correct and address any issue that might negatively impact your credit score.
Step Three - Pay Your Bills on Time.
This is the no-brainer. We all know that it looks bad if we pay our bills late and getting those late fees is nothing I like to wake up to. More than 30 percent of your credit score reflects your payment history. The rule of thumb is that it’s never too late to start paying your bills on time and doing so will definitely improve your credit score. Besides forgetfulness, late payments are generally a sign of financial difficulty. For lenders this can indicate a possibility that you might default on your loans.
Step Four - Be smart about your credit cards
There are several ways to be smart about your credit cards.
1. Don’t apply for unnecessary credit.
New credit is about 10 percent of your credit score and having a
lot of new credit can negatively impact your credit score for several reasons. First, it can reduce the length of your history by reducing your average account age. If you go on a spree and apply for all of those ‘get 10% off when you open a new account’
offers at Christmas time or any other time, you’ll be in for a big surprise when you check your credit score. Second, if you already have a lot of credit and your credit utilization is high, to a lender it can indicate a financial problem.
2. Keep balances low
After I filed for bankruptcy about 5 years ago, I made the decision based on my lawyer’s advice that I needed to e-establish my credit history. What he told me was that I needed to sign-up for a couple of credit cards, spend a little each month keeping the balances low, but be able to pay them off each month. In this way, I’ve been able to keep a good ‘utilization ratio’ while not getting in over my head.
The ‘utilization ratio’ is the amount of available credit you have in relation to the amount you owe in credit debt. This accounts for 30 percent of your credit score, so keeping the utilization ratio low is important. This is not just about paying off your credit cards each month; it’s about consistency and
debt management. You also want to keep your accounts active so that the companies continue to report.
3. Be conservative, but judicious about the credit you have
There are two things in balance here. For one, lenders want to see a well-managed credit history. Second, there’s been an increase in identity theft. Identity theft necessitates the need
to be more aware of what credit cards you have. Recently a friend of mine was the target of identity theft, and unfortunately, he was so spread out with loans that he had no idea what was his and what wasn’t. The lesson here, the fewer you have,
the less you have to manage. It really makes checking your credit report a lot easier, too.
However, that doesn’t necessarily mean you want to start closing accounts because you want to minimize your identity theft risk. Length of credit history is about 15 percent of your credit score and every little bit helps. You want to make sure that the credit cards you have are well established, meaning there’s a long credit history with that lender. Another thing to consider is that closing accounts changes your credit utilization ratio.
The author of this article runs OpinedMind.com and
is currently a Ph.D. student writing articles on the issues of
finding funding for college and debt management based on personal experience and many hours of research.
