How to Improve Credit Scores
Poor credit scores impact your life on many levels. Not only do they make it harder and more expensive to get any loan, from homes to automobiles to cellphones, they can make you appear irresponsible to prospective landlords and employers, too.
FICO scores, the credit-scoring system used by the Fair Isaac Corporation to help banks and other lenders determine a borrower’s credit-worthiness, change with every new report as well as new inquiries from lenders. The good news is that if you want to improve your scores, you can.
Start by knowing what lenders, employers and landlords want to see – responsible use of credit. Your credit scores are based on algorythms that assign differing values to the following:
On-time, late or missed payments - the most important metric, worth about 35% of your FICO score.
Credit utilization ratio —the percentage of credit availability you have versus the percentage of credit you’re currently using. It’s recommended you stay under 30%.
Total debt —credit cards, loans, and other credit accounts.
Credit mix – the types of accounts you have. Lenders don’t want all your credit going to clothing stores, for example.
Age of accounts – long-standing accounts suggest reliability.
Hard inquiries - recent applications for new credit. You can check your credit scores for free once a year, which is considered a soft inquiry. You’re also not penalized with a lower credit score if you compare mortgage lenders who access your credit scores.
Public records – bankruptcies, civil judgments including obligations to pay alimony and/or child support.
The best way to know what you need to repair is to get a copy of your credit reports and scores. You can get these from the three credit bureaus, Equifax, Experian, and TransUnion for free once a year or you can pay a fee to get a three-bureau report. The report will come with an explanation of any derogatories so you’ll know what needs to be fixed.
In the meanwhile, you can be proactive:
Pay down or pay off revolving credit cards, but don’t close the accounts.
Don’t consolidate credit cards. You’re better off having small balances on multiple cards than a large balance on one card.
Pay down installment loans next, such as car loans and student loans; they may be larger in dollar amounts, but are considered less risky than revolving credit.
Keep credit card balances low or at zero and don’t apply for new credit.
Pay all bills on time and with at least the minimum payment due. Lenders like on time payment histories.
Shop lenders simultaneously. Multiple inquiries from mortgage lenders is expected, but don’t spread it out over weeks or months.
Remember, mortgage lenders are most interested in your ability to repay their loan. The most important factors are job and debt payment history. Job security – long-term employment in the same field and on-time credit payments are the best ways to build and protect your credit scores.