Improve Your Credit Score

Posted On: 2007-01-16Length:

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Hello, and welcome to Money Girl's quick and dirty tips for a richer life.

Today's topic, how to improve your credit score. Getting approved for a loan at the best possible interest rate and terms, depends on your credit worthiness. For a major purchase, like a house or a car, a lower interest rate can save you a lot of money over the life of the loan. So how do you find out if you have good credit, and what can you do to improve your credit score?

First, credit reports explained. Your credit report shows your payment history for credit, including credit cards, student loans, car loans and mortgages. If you've been late with payments, that information appears on your report. A credit report shows the balances you owe, and the amounts of your credit limits. It also shows other information, such as collection accounts and public records information, like bankruptcies, tax liens and foreclosures. Lenders use the information on your credit report, as well as other information, when they decide whether to lend money to you. Even though people talk about their credit report or credit score, as if there's only one, you really have three major credit reports and scores, one from each of the three major credit reporting agencies. Equifax, Experian and Trans Union. Creditors report your payment information to each of these agencies. Your credit score sums up all the information on one of your credit reports into a single number that gives lenders a quick read on likely you are to pay back a loan. Each credit bureau may have a different score for you, because the credit history each one has for you, may be different. There are different credit scoring systems, but FICO scores are the most common. The scores range from 300 to 850, and most lenders consider scores that are 700 or better to be very good.

So what action can you take to help improve your score? The first is to pay your bills on time. This is the number one best thing you can do to improve your score. Keeping your credit card balances low also helps boosts your score. For example, a person with a thousand dollar balance on a credit card with a $10,000 limit will typically have a higher score than somebody with a $9,000 balance with the same $10,000 limit. Now I don't know where the actual sweet spot is, but I've heard that keeping your balances under half the total credit limit, can help improve your credit score. A long credit history helps, too. So think twice before closing a credit card you've had for a long time and paid on time. To optimize your credit score, it's best to keep your number of credit cards to four or less. More than that can pull down your score. And a mix of different types of credit helps. It's better to have a car loan, a student loan, and a couple of credit cards, for example, than to have just several credit cards. It's also helpful to keep credit inquiries to a minimum. When a prospective lender pulls your credit, the inquiry is reflected on your credit report and can bring down your score. Don't worry, though, about checking your credit report yourself. It doesn't adversely impact your score. In fact, it's a really smart idea to check your own credit report before applying for a loan for a major purchase. Errors frequently appear on credit reports and can lower your score. Unfortunately, I had to learn this one the hard way...