How to Improve Your Credit Score

How to Improve Your Credit Score

Consistently Pay Your Bills on Time

One of the most important components to improving your credit score is to consistently pay your bills on time. This does not solely apply to credit cards, auto loans or mortgage loans. It also includes utilities, cell phone and bills from any other companies that may report the late payments to credit bureaus. Payments that are over 30 days late may put a blemish on your credit report and lower your rating. Also, the longer it takes for you to pay the bills, the more significant effect it has on your final score. That is because payments that are late fall into a category based on the amount of time that they are past due such as 30, 60, 90 and 120 days. In other words, for every incremental period of additional tardiness you would experience a bigger the drop in your credit score.

A single offenses - such as being 30 or even 60 days late once - will not harm your score significantly. It may also go away altogether after a year or two. But if you are late on a consistent basis, this could all change. Scoring models predict the likelihood that you are going to reach 90 days in your delinquency. When you get to that point, you can damage your credit score for up to seven years. If payment is sent to a collection agency, your credit score will decline even further. If you aspire to the 800 club (a perfect credit score), you want to pay careful attention to when your bills are due each month and ensure that your debts are consistently paid on time. 

In the event of an isolated missed payment or just a brief period of forgetfulness where you forgot to pay a couple of bills, you may be able to remove the late payment from your record. The first option is to speak to the creditor and ask for a goodwill adjustment. If you have done business for a long time and rarely pay late, you stand a greater chance. If the money is still due the creditor, you may be able to remove the blemish by agreeing to have all outstanding funds owed automatically drawn from your bank account.  If the late fee was inaccurate or it cannot be verified by the creditor, you may also request that it be removed from the credit report.  Use a company’s disappearance as an opportunity to fix damage that company may have done to your credit.  For example, when Worldcom went bankrupt in 2002, it offer a great chance for anyone who had ever done business with them to remove the damage that they had done to their credit (Worldcom and MCI had a real knack for damaging the credit of any customer who was ever even a day or two late in paying).  

Keep Track of Your Utilization (Outstanding Debt to Available Debt)

After regularly paying your bills on time, keeping track of your outstanding debt to available debt is another important factor when determining your credit score. It could possibly account for as much as 30 percent of your total credit score. Although it sounds like a simple feat, it takes a lot of careful planning. When it comes to calculating a person’s credit score, they’ll take into account the amount of credit used and compare it to the actual numbers that are available to you. If your line of credit says you have $10,000, and your balance is $3,000, you are borrowing 30 percent of that credit and have a 30 percent utilization ratio. 

Your credit/debt utilization ratio should fall below the 25 to 30 percent range. You can calculate this figure on your own by dividing the amount of debt and amount of available credit. If the figure exceeds 30 percent, one easy fix is pay down your debt.  However, another strategy to lower it by applying for another credit card with an additional credit line (increasing the denominator).   For example, if you are running a $3,000 balance on $10,000 of outstanding debt available and add $10,000 in outstanding credit, you will drop your ulitization ratio from 30% to 15%. 

Asking your creditors for additional credit is one way to increase your credit line. If you have paid your debt in a timely manner over the years and are seen as a good customer, your chances of increasing your credit line should be excellent. This can help improve your debt to credit rating without affecting the length of your credit. While you are speaking to the credit card representative, ask to negotiate a better interest rate. Although it won’t affect your credit rating, the money you save on a lower rate could be put towards paying your debt off faster. In the end, that could also help improve your credit score. 

Another way to improve your utilization rate is to open a new credit card with an additional line of credit.

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Your credit report is also affected by how you spread out your debt that you have available.  It is often better to spread of the debt.  If you place the entire $3,000 on one credit card and leave the other cards with a zero balance, you could still suffer a lower rating because you’ve maxed out the one credit card. If you find it hard to pay the entire amount in full at the end of the month, spread out the debt to the remaining credit cards. You could also put the charge on the credit card with the largest limit. But you need to verify that the interest rates are similar to avoid paying exorbitant fees.

Be Careful with Opening Additional Accounts

It has been said that opening too many credit cards can damage your credit score.  BestCashCow’s own studies indicate that is not the case, but rather that your utilization rate can be helped through additional cards.   However, you should not open cards that you do not intend to keep.  As this article points out, the act of closing a credit card account is the act that is more likely to hurt your credit score.

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