Saturday, January 05, 2013

How to Increase Your Credit Scores


A Guest Post by Sushil

A good credit score makes your life considerably easier. It can help you obtain better terms on your unsecured loan, but it can also speed up negotiations when you want to rent a house, or when you try to get better insurance, and even when you search for a new job. It has an impact on so many aspects of your life that the effort spent on improving it will pay off in more ways than you can anticipate.

Learn What Matters

The credit score is meant to evaluate your financial behavior, and your ability to control your debts and to make the due payments on time. This means that not everything related to your finances contributes to your credit score; for example, your savings or investment accounts have no impact on it. (However, if you want to borrow against a savings account, for example, the respective lender will adjust the terms accordingly.)

The most important aspect of the FICO score is the payment history, which represents about 35% of the credit score. Therefore, a late payment will have a drastic impact on your score, and a major event, such as foreclosures or bankruptcies, will leave a mark for many years. (It should also be mentioned that the FICO score is the most commonly used, but not the only one, so criteria may vary.)

Debt represents another 30% of your score. For most people, the most confusing aspect here is revolving debt, such as credit cards or credit lines. The score takes into account the maximum debt you are entitled to, versus the amount you're actually using. Therefore, maxing out your credit cards will have a negative impact, but so will closing these credit cards, because you reduce the total debt you're entitled to in this way. (Needless to say, credit cards also carry other fees and taxes, so sometimes it may be a good idea to close some, and let your score take a hit, if this brings you considerable savings each month).

Other Factors that Improve your Credit Score

The diversity of your accounts and the inquiries made to your credit score each contribute 10% to the total value. The diversity proves to the lenders that you're able to juggle multiple accounts without losing track of any of them, so having various types of loan with bad credit is a good idea. However, too many inquiries during a short amount of time – such as those made by lenders when they evaluate your credit application – may damage your score.

Your own inquiries, as well as those made by councilors authorized by you, have no impact – so you can check your credit report as often as you want, as long as you pay the required fees. Also, inquiries made by potential employees, utilities companies, landlords, and so on do not count, so there's no need to worry about those.

Last but not least, 15% of the score is given by the age of the accounts on file. Closing a very old account may have a significant negative impact on the score. If you have some old credit cards that you're not using anymore, it may be a good idea to take out small amounts from each of them every couple of months, to insure that the issuer keeps them active, so that they still count on your report.  

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