I was recently talking with my young nephew and he was telling me about just buying his first new car. I was so proud of him, I really appreciate how he steps up and works hard for the things he wants in life. Out of curiosity I asked him how much interest he got for his loan. He said Auntie you would be proud of me I used some of the tips you told me about raising my credit score. I used them raised my score and got a loan for 3.5%. I can remember when I bought my first car and the ridiculously high interest rate I was willing to pay just so I could have a car. At that time I didn’t think how much the loan was really costing me. I didn’t think it made a difference just so long as I could afford the payments. I of course have learned a lot since my first major purchase right out of high school. My nephew bought his first car for 3.5% interest, the average going rate for people with a good credit score versus 12.75% a possible rate for credit score of 650 or lower, saving himself over $6,200 for the 7 year life of the loan. Needless to say that’s a lot of money!
Aside from determining your interest rate, your credit score is one of the biggest factor in your financial health. Your credit score can impact your ability to;
1 Get a loan
2 Get a credit card
3 Rent an apartment
4 Get a mortgage
5 Get auto insurance
The commonly used FICO credit sore ranges from 350 (very unlikely to repay) to 850 (very likely to replay). Often a 720 or higher score is considered a strong FICO credit score, but different lenders have different standards. So it is very important that you maintain the highest score you can. I’ll share some solid tips on raising your score shortly. First I’ll breakdown what impacts your score.
Factors that make up your credit score
1. On-time payment percentage – This is the percentage of payments you’ve made on time during your credit history. It’s a factor that often weighs heavily into your creditworthiness. So just one or two late payments could significantly impact your score.
2. Credit card utilization – How much you owe in relation to your credit limit can make a difference of 30 to 50 points in your score. The percentage is calculated by tracking your total credit card balances and dividing that number by your total credit card limits. It essentially shows creditors how much of your available credit you use on an average. You want to keep you usage under 30% of your credit limit.
3. Average age of open credit lines – The longer your credit history and the older your accounts the better. That is why it can be a good idea to keep older credit cards open and active. You just need to maybe buy a very small item say like gas every other month, then pay it completely off.
4. Total accounts – Consumers with more accounts (or more lines of credit) often have higher credit scores because it indicates that more lenders are willing to give them credit. Having a good mix of different types of credit is a good overall credit health as well. But don’t just open a bunch of accounts you don’t actually need. I think having 3 – 5 credit cards, and 1 – 2 lines of credit/installment loans is a very good mix.
5. Hard inquiries – When you apply for credit like a credit card, mortgage or auto loan a hard credit inquiry is initiated on your credit report. Just one isn’t too bad, just indicates that you’re maybe looking to opening a new account. Several inquiries make you look disparate and could indicate to lenders you’re in financial trouble. A soft inquiry is when you check your rate yourself, this does not go against your score.
6. Derogatory marks – These are negative items on your credit report like collections, tax liens or bankruptcy. Unfortunately these can stay on your credit report for 7 to 10 years. These are red flags to lenders and they take them as indications that you may have mismanaged your credit in the past.
Some tips to how to raise your credit score
1) First know your score, and monitor it regularly – You can get free credit report directly from the 3 credit bureaus annually – Experian, Equifax, and TransUnion. These days a lot of financial institutions are providing you your free credit score. Your bank, lender, credit card company may be providing this as a free benefit. There are free online places like annualcreditreport.com. Credit Karma, Free CreditReport.Com.
2) Pay on time –
a. You should always make your payments as agreed. If for some reason you need to be late or you cannot afford the normal payment amount contact your lender right away. They will more often than not work with you. You can make arrangement to skip a payment, extend your due date, or lower you minimum amount due. Be prepared they will ask you a lot of questions, like job status, income, when will you be able to resume making regular payments. etc, etc. Don’t fret, better that you do temporary payment arrangement until you can get back to making your regular payments. This will circumvent a late payments showing up on your report, which can lower your score. Do what ever you can not to miss your payment altogether.
b. Higher Scores hit harder – You probably think paying on time goes without saying, and it kinda does, but did you know it is particularly important for folks with good credit to continue to pay on time? You might be surprised to learn that a single late payment could potentially cause a 100 point score drop for someone with a credit score of 750 or higher. The reason why a consumer with such stellar credit scores could see such a huge score decrease after just one late payment is because credit scores take the path of least resistance, like water. It’s easier for a consumer with a high score to experience a 100 point score drop than it is for a consumer with a low score to experience a score drop of the same magnitude.
c. Good Will Removals – While it’s a long shot, it’s possible for you to convince your creditor to remove a late payment from your credit reports. When a creditor removes an accurate late payment for you it is known as a “good will removal.” Good will removals are not always granted but if you have an otherwise flawless payment record with a creditor then the likelihood will be much higher. Whether or not it works, it certainly will not hurt for you to ask. You know what they say nothing ventured nothing gained.
3) Don’t delete old paid off accounts – Older account actually improve your score. Since your credit history makes up the largest portion of your score (see the chart above), keeping paid off accounts active plays in your favor.
4) Clean up derogatory marks – Correct any errors. The Federal Trade Commission suggests that 10 to 21 percent of consumers have errors on their credit reports. Fixing them can help raise your credit score. There’s a chance that an error on your credit report may be behind your lower credit scores. You can identify errors by pulling your credit reports for free at annualcreditreport.com. If you find an error you can dispute the account with the credit reporting agencies. If the error is confirmed and deleted by the credit reporting agencies, and the item was causing the lower scores, then they should improve and improve considerably. I can write a whole blog just on how to clean up your credit. Email me if you’re interested. If I get enough interest I’ll respond here with top tips/suggestions.
5) Keep balances on credit cards less than 30% of credit limit. As I mentioned early this can almost immediately up your score 30 – 50 points!
6) Be in the Know – Regularly check out credit advice sites, and bloggers. New information and tips come up daily. Some good sites are; Credit.com, CreditSesame.com, www.experian.com/blogs/ask-experian, Mint.com, CreditCardInsider.com. Some great bloggers; Allison Martin (credit scores & credit cards), Rob Infantino (auto loans), Kirk Haverkamp (mortgages), Maggie Perkins (personal finance), Jason Steele (credit cards), and John Ulzheimer (credit reporting, credit scoring and identity theft).
What this girl knows if you follow the tips I outline above your credit score should increase significantly, improving your purchase power and saving you a lot of money!
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