A good credit score can mean the world when
borrowing money for whatever reason, a mortgage loan, auto loan,
home equity loan, etc. A good credit score means lower monthly
payments and lower interest paid over the life of the loan.
However, a bad credit score means the exact opposite, higher
interest & higher monthly payments. In this article, we
will tell you how to improve your credit score by following
these 4 simple ideas.Note: Most mortgage lenders will look at your FICO Credit
Score. We will therefore base our ideas on the FICO
credit score.
FICO
is a software that calculates your credit score and your
risk levels of default, created by Fair Isaacs Corporation.
Your Credit score is determined by your Credit Bureau
and some of the factors involved in calculating your credit
score include:
-
Credit payment history (whether you have been paying
on-time or are delinquent)
- Your
current total outstanding debt
- Frequency
of applications for new credit
- Time
length of credit history
1) Pay Off Your Debts
To get good mortgage loan terms, you need
to have a credit score in the 700 - 720 range. The expected
national average is 723 according to Fair Isaac. What's the
best way to increase your credit score in the short term? The
best way is to pay off any high debt balances on your credit
cards which could increase your credit score by a whopping 60
- 80 points overnight! Credit Bureaus look at how you handle
credit card debt, whether you try to pay it off as fast as you
can, or you are the type of person that only meets the minimum
payment schedule. If you are determined to pay off your high
credit card balance, this will reflect on your credit score
and will net you favourable terms with mortgage lenders.
2) Never Use More than 50% Of Your Credit
Limit
If you spend more than 50% of your credit
limit every month, this indicates to the Credit Bureau that
you do NOT have enough cash on hand to meet your monthly expenses.
This will term you as a high credit risk and will actually reduce
your credit score by 60 - 70 points overnight (according to
Craig Watts working at Fair Isaac). You need to minimize your
credit limit usage and keep your credit balances owed very low
for atleast 3 months before applying for credit or a mortgage
loan.
3) Don't Close Old Credit Cards
In the above bulleted list, we mentioned "Time
Length of Credit History." If you have credit cards that
are 4-5 years older, then it's NOT a good idea to close them
down. Use those to maintain your credit history and use them
responsibly! Furthermore, do NOT go out applying for new lines
of credit at any retail store or bank, and do not go out asking
for an auto loan, because that will decrease your credit score
by a few points instantly.
4) Ordering Your Credit Report or Seeking
Credit Counseling
Here are some myths that do NOT affect your
credit score in any way.
