No matter where you are starting, a credit score of 599 or below or a credit score of 700 or above, the following tips will improve your credit scores.
The better your credit score, the better your interest rates and loan terms. Good credit scores can bring a financial peace of mind and one less thing to worry about in this volatile economy.
The credit crunch of 2008 has moved the bar. In the past a credit score of 720 was considered excellent and would get you the best rates. Now, a credit score of 750 is considered excellent and will afford you the best rates for most financial products, including insurance rates.
Let’s concentrate on the two major factors contributing to your credit score and a way to re-establish credit if you have experienced problems in the past:
Major Factor No. 1 is Payment History
Credit scores are calculated using 35% of your payment history; this has a huge effect on your credit score, positive or negative, depending on your payment habits. Missed payments along with late payments can kill a credit score.
If you have been late or missed a payment, do not continue that behavior. Bring any late payments current and stay current. You need to have good payment behavior to counter any past negative behavior.
Recent payment behavior has a much bigger impact on your credit score than older payment behavior. Older late or missed payments have less of a negative impact on your credit score but make sure you pay your bills on time going forward.
If you have a recent collection account, deal with it. If you pay the collection account request a full deletion of the collection account, as a paid collection account does nothing to improve your credit score. It is still a negative paid listing.
Another option would be dispute the collection account in order to try to get it removed from your credit report. An older collection account may not be impacting your credit score as much so it may be better to leave it alone.
Major Factor No. 2 is Amounts Owed
Credit scores are calculated using 30% of the amounts owed. This category may provide more flexibility in improving your credit than the “payment history” category. With a little practice and discipline, you can spend less and decrease the amounts you owe on credit accounts.
The most effective action you can take is to lower your balances on revolving debt such as credit cards. It will have in immediate impact and help you improve your credit scores. The amount owed on a credit card should be kept to 30% or less of your available credit limit.
Maxing out credit cards will have a negative effect on credit scores. Paying down your credit cards and other revolving debt reduces your credit utilization. The key here is to have the available credit but not utilize the available credit.
In reducing the amounts owed on credit cards, never close credit accounts, whether they are paid in full, older or just unused. Keep older accounts open even if you do not use them because it will add to your length of credit history which accounts for 15% of your credit score.
And remember, closing an account that you’ve had a negative payment history with will not make that negative history go away. Consumers sometimes mistakenly believe closing a problem account makes them go away, it does not. It is better to deal with negative accounts through the dispute process than to close the account. In fact, closing old credit accounts will likely lower your credit scores.
(3) Credit Cards and Installment Loans to Improve Credit Scores
This may seem obvious to some consumers but you must have credit in order to improve your credit scores. It is not uncommon for consumers experiencing past credit problems to stay away from credit once those credit issues have been resolved. Some may never re-enter the credit arena. Your credit score will not improve if there is nothing in your files or you have limited credit information to calculate a credit score.
If you have experienced past credit issues but are now financially capable of managing credit, re-establish your credit history. Start by opening 2 or 3 credit accounts, pay them on-time, maintain low balances; and over time, your credit score will greatly improve.
Credit unions offer credit cards at great rates if your credit is good; however if your credit scores are lower, an alternative would be a credit card that extends credit to consumers with poor credit like the Cerulean Discover® credit card, designed specifically to help build a positive credit history.
Opening an installment loan such as a personal or auto loan will really sky rocket your credit score if managed correctly with timely payments. But be careful, an installment loan calls for a greater repayment commitment on your behalf. The greater commitment is what gives the greater reward with improving credit scores.
If you do not have the funds to repay an installment loan, do not open one. If your credit scores are decent check with your credit union, they often have great interest rates on loans. Lower credit scores may not get approved, in that case, check online sources for personal loans options (but make sure the interest rate is competitive).
Once you begin working on improving your credit scores, it is important to monitor your credit scores on a regular basis to see how you are doing. It will help you stay on top of and take control of your credit.