Understanding and Improving Your Credit Score

Understanding and Improving Your Credit Score by Fabienne Swartz

Source: myfico.com

{4:46 minutes to read} In today’s world, it is vital to have as many financial resources as possible. Credit cards are often lifesavers, making it possible to catch a last-minute flight or even get an extended-stay suite. An important step to standing on your own and becoming financially strong is establishing your credit as an individual—something that can be done only with time and patience, and with the wise utilization of credit accounts. So what goes into your credit rating, and how do you make it better?

Payment History

35% of your credit score depends on your payment history—but that does not mean your payment history to utility companies! Being late with your cable or electricity bill will only impact your credit if they hire a collection agency to collect on the unpaid balance(s). Likewise, back taxes do not impact your credit unless the IRS affixes a tax lien on you, and that only occurs if you owe $10,000 or more.

What the credit reporting agencies care most about is how you have paid your credit-based obligations, such as your car payment, mortgage, and, of course, your credit card debt.

Amounts Owed or Credit Utilization

30% of your credit score depends on your credit utilization ratio, or “Amounts Owed” on the graph. The same amount of debt will be looked at differently by credit reporting agencies. In other words, if you max out your available credit, you might look like you cannot manage your debts responsibly.

Let’s say you have reached your limit on all of your credit cards, totaling $5,000. That is a 1:1 ratio. Someone who has used $5,000 of their total credit of $10,000 would have a 1:2 ratio, half as big as the previous ratio. That is why I counsel all of my clients to keep whatever cards they have, especially if they don’t use them; having unused available credit will increase your credit score. Ideally, you want to keep your balances at about 20% of your credit limit.

Credit History

Banks and others who are looking at your credit history like to see long-standing relationships. If you have a card that is several years old but you don’t want it anymore, think twice before cutting it up and closing the account.

Credit Mix or Type of Credit

Credit reporting agencies like to see a mix of different types of loans.

It is viewed favorably when a consumer has an auto loan, mortgage, credit cards, and retail accounts.

New Credit

When you apply for a new loan, the credit check that gets performed is called a “hard pull.” Too many hard pulls can negatively affect your credit score, because it may look like you are financial trouble. There’s also such a thing as a “soft pull” which occurs when a third party requests to see your credit score, most commonly when a credit card company pre-approves you for a new card.

There are some do-it-yourself ways to improve your credit, but they require work, discipline, and patience.

  • The three credit agencies in the United StatesEquifax, TransUnion, and Experianare required by law to provide a free credit report to every consumer, once a year. That means you can check your credit for free three times a year. Examine them carefully for any errors, and if there are any, then take all the steps necessary to rectify the situation.
  • Pay your bills on time, always. Never miss a payment on your loans or credit cards, mortgage, or taxes. I recommend setting up an automatic payment to ensure that you never forget. It’s easy to set your account to pay the minimum amount due—and then hopefully you can make another payment on top of that. In any case, you will never be late. 
  • Pay down the debt you already have. If your credit ratio is close to 100% (1:1), your credit history will not improve, even if you pay everything on time—so try your best to pay over the minimum amount due. 
  • Use your credit card like a debit card: Live within your means, but make your purchases on a credit card that you can pay off when you get home (or once a week, etc.), before the statement closing date. This helps your credit history and utilization ratio. 
  • Don’t pass your credit limit on any cards. In addition to making yourself susceptible to fees, it will be perceived poorly by the credit reporting agencies. 
  • Don’t open too many accounts too quickly. Walking through the mall, you might be tempted to open a new account at every store you visit in order to get some sort of discount. Doing so will add to your new credit and be viewed unfavorably. 
  • There’s no shame in asking for a lower interest rate on cards you already have. Sometimes it works! 

Improving your credit rating requires time, patience, and discipline. There is no quick fix. So what are you going to do about it? Consider getting professional help! Contact me to learn more.

Fabienne Swartz JD (Belgium) CDFATM
Certified Divorce Financial AnalystTM
www.financially-strong.com
500 Mamaroneck Av.
Suite 320
Harrison, NY 10528
(914) 798-6940

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