Secrets Of Credit - Part 3

So now we now that your credit score is the number used in almost every financial transaction that you make (now or in the future). We figured out how is was calculated as well. It’s a good idea to always know what your score is, and understand how lenders will see you as a financial risk. It's also vital to learn how you can improve your score if it is not up to snuff.

Your credit score really just reflects how well you handled the credit given to you in the past. As we already learned, your credit score is determined by the amount of credit you have, how much money you owe, and whether you made payments on time.

What most people do not understand is that a lender can only use this "credit score" to determine your risk factor going forward. They have no other data to pull from. Your credit score serves as the only predictor of how likely you are to repay any credit given to you. If your history indicates that you usually make payments on time, you should have a good credit history. This will make it easier for you to get credit cards and loans from banks.

But what if your history says other wise? What if your history indicates that you have been irrresponsible with money? In this case, you will find it difficult to get any institution to trust you. If that’s your situation, it doesn't have to be the end of the conversation.

Thankfully, I wrote an article on raising your credit score previously. It was entitled, 6 Things That Can Improve Your Credit Score, and I will borrow an excerpt from that article below. These are the 6 most crucial things you can do to increase your credit score right now.

1. Pay on time
This is by far the most obvious way to improve your credit score, and it is still the #1 way for improving your score for a big reason. Your payment history makes up a whopping 35% of your credit score. It doesn’t matter if you’re only a few weeks late or a even a few months behind, paying your bills late will always result in a lower credit score. Simply put, don't miss your payments. 

2. Pay down debts
Your credit score is also comprised of your DTI, or Debt To Income ratio. This is a tricky one to figure out because you have to use your credit in order to build a payment history, but you also want to have your debts paid off at the end of each month. Your credit score is a reflection of how well you manage your credit, but if you pay off your debt completely each time, then you have no credit to manage because you don't owe any money to anyone. The best way to approach this is to pay off your revolving debt each month (credit cards and other high interest loans), but leave a little payment to manage from month to month (small home equity loan or a refinance of old debts).

3. Assortment of credit cards
Similar to paying off your debt each month is also showing that you can manage different types of credit cards without a problem. This is not to say that you should have 10 different credit cards, but having a few (2-3 major ones) different credit cards will improve your credit score. Have a Visa, MasterCard, Discover, and an American Express for example. Having multiple cards and credit lines open will show that you can manage your short-term and long-term credit obligations.

4. Delete any errors on your credit report
This is the quickest and most efficient method to raise your credit score without doing very much. Correcting any errors on your credit report can raise your credit score 50-100 points very quickly. There is a little time and effort required to do this, but fixing these errors will save you from having to deal with them later on, and it just might boost your credit score.

5. No new credit
Once you have a house to live in and an assortment of credit cards for emergency purposes, do not open any more lines of credit unless it is absolutely necessary. It is important that you stay away from getting new credit. Why? Every time you apply for new credit, an inquiry is added to your credit report. These inquiries will drop your credit score by a few points every time.

6. Don’t ever file for bankruptcy or foreclosure
Filing for bankruptcy, or having a home foreclosed on, will crush your credit score. Both of these actions stay on your credit report for 7 years. Not only that, but they also decrease your credit score to the point of not being able to improve your overall financial situation. The good news is that over time (3-5 years) a foreclosure or bankruptcy will impact your credit score less and less.