Like it or not, having good credit is essential for your overall financial health. Unless you are able to buy everything with cash (and if you are I doubt you have a need to read this article), you will need to borrow money at some point in your life. Whether it’s for a house, a new car, or an education…some of the biggest purchases you make in your life will be with borrowed money. The key then is to borrow money for least amount of cost as possible. In order to get offered the best interest rates, and not have to worry about getting rejected, you need good credit. Most lenders use the FICO credit score to determine your credit worthiness. We will discuss some ways to improve your credit score, so you can get the best lending rates on your big purchases.
- Pay your bills on time
- Reduce your recurring debt
- Stop applying for new credit
- Don’t close your accounts
- Have a consistent credit history
Pay your bills on time
The single best way to increase your credit score is to pay your bills on time. If you are reliable at paying your financial obligations, and have been over a period of time, then it’s obvious that lenders will see you as a much lower risk. Your credit score aims to show how reliable you are as a payer, so the longer track record you have of paying your bills the higher your score will ultimately be. The quickest way to ruin your credit report is to miss payments, so make sure you keep a close eye on your due dates.
Reduce your recurring debt
Recurring debts, such as credit card debt, can really hurt your credit score if not managed properly. If you have a high percentage of total outstanding balance compared to your total credit limits, it hurts your score substantially. Work to pay down your recurring debts first, especially credit card debt. A good rule of thumb is to not be using any more than 30% of your total credit at any point in time.
Stop applying for new credit
The length of time you have held your accounts factors into your score as well. So if you have a lot of newly opened credit accounts on your record, it lowers your score. Lenders want to know that you’re not going out and acquiring a bunch of new credit that you may not be able to handle. Stay away from those high-interest retail credit cards just to save a quick 10%. Those still count as a opening a new credit account, and hurt your score.
Don’t close your accounts
One of the early mistakes I made in handling my credit was closing my accounts after I paid off the balance. Effectively what that does is reduce your total amount of available credit. That gives you less credit to work with in that 30% equation. Instead of closing the accounts after you pay them off, just organize all of your account information and put the card away with no intent to use it anymore. That way you don’t run the risk of building up your debt again, but you don’t unnecessarily hurt your credit score by removing a long standing credit account.
Have a consistent credit history
The downside of trying to build up your credit score is that you cannot do it overnight. Lenders want to see consistency and reliability over a substantial period of time. Having items like mortgages, auto loans, and student loans in good standing show that you are able to handle substantial debt. The longer you are able to pay them without incident, the better you will look to potential lenders. They want proof that you’ve been able to do it before, and will continue to do it in the future.
Having a solid credit score is important to be able to get the best financial rates and loans available. Usually if you follow a solid personal financial management plan and work to manage your debt, your credit score will naturally improve a great deal. The credit score is a measure of consistent financial responsibility, so the better you get at handling your finances, the better your score will ultimately be.
February 15th, 2008 at 7:58 pm
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February 16th, 2008 at 1:20 pm
[…] For tips on improving your credit, check out our Know The Ledge article How to raise your credit score. […]