The range of the credit scores is between 300 and 850. Late bill payment or a lapse in the payment of the bills can damage your credit score. If the credit score is below 620, getting any kind of loan is difficult. When the economy is booming, credit score of 700 is considered as an excellent score. At the time of an economic recession credit score of 700 is considered as an adequate score.
Statistical reports say, there are several million people in the US, with a severely damaged credit score, in the wake of back-breaking recession that has been eating into the economy, for the past few years. Credit blemishes are a hindrance in obtaining loans and credit cards.
If the credit score is bad and a loan is granted, you would have to put down a huge down payment and pay high premium rates. When there is an economic crisis, you would need a credit score of 720, to get a mortgage or an automobile loan.
It is wise to repair your credit score, if it is bad, before approaching the financial institutions or banks for a loan or a credit card. If you have an adequate credit score of 700, you can also improve it to 720 before applying for a loan. In this article, you will find some essential tips on improving your credit scores by changing your financial habits.
Ways to Improve Credit Score
Prior to applying for a loan, you should check your credit rating. You can get a copy of the credit report from either one of the major credit bureaus (TransUnion, Equifax and Experian). Review the credit report for any discrepancies. If there is any, you can send a credit repair letter to the concerned official, pointing out the discrepancy. Here are a few useful steps to improve your credit score.
One of the significant attributes that determine the credit score is the payment history. The creditors will look into your most recent credit history to evaluate your credibility. Improve your credit history by paying the bills on time. Delinquent payments can lower your credit score. Paying bills on time will help in rebuilding your credit rating.
You can avoid late payment by setting up an alerts or reminders on your mobile phone. Other options are online bill payment and automatic deduction from your bank account. The utility bills, credit card bills and loans can be linked to one of your bank accounts. Ensure there are sufficient funds in the linked bank account. You can ask the utility service providers to send you email and mobile alerts.
Put Down Extra Amount in Credit Card Balance
It is wise to use only 25% of the total credit card limit. One of the factors that affect the credit rating is the total amount you owe on your credit cards. Suppose you hold four credit cards and the maximum limit of each card is $3000.
Your total credit card limit is $12,000 and you can use 25% of $12,000. However, if you have crossed the limit, you should put down more than the minimum amount due. This helps in improving the credit score.
Wider the gap between the total credit limits on the credit cards and the amount of debt reported, the better. The total amount left in the credit limit is taken into consideration by the banks and financial institutions when you approach them for a loan or a new credit card.
Do Not Close Unused Credit Accounts
One of the models used by the credit bureaus to calculate your credit score is FICO credit scoring model, which was developed by Fair Isaac Corporation. According to FICO, "Closing accounts can never help your score, and often it can hurt."
Suppose you have several credit card accounts and are using only a couple of them, the total credit limit will be more. If you close the unused credit card accounts, it will lower the total credit availability and the ratio of balance-to-limit will become more. This will affect your credit score, quite badly.
Another point is, when you close one of your oldest credit accounts, it will shorten your credit history. This would not only affect your creditworthiness, but also make you unworthy of credit.
If the economy is booming and you have a good credit score, closing one of the unused credit accounts would not affect your score much. However, at the time of recession, you have a good credit score and want to improve the score, then closing the unused old credit accounts would affect the credit ratings badly. You need to take into consideration the current economic scenario before closing unused and old accounts.
When you apply for a new credit card, the card provider would check the length of credit history first before checking your credit score. Do not close your old and unused credit accounts because the credit card company would reject your application. The credit companies treat the customers who are perpetually in debt but have never defaulted on the minimum payments.
If you have a good and adequate credit score, then it is wise not to apply for new credit cards, even if it offers a good discount for new customers. Each new account can hurt your credit score, if it is not put to use wisely. Again, closing accounts can also be detrimental to your score. Therefore, remember to apply for a new credit account only if there is a need for it.
Get Professional Help
If you are neck-deep in debt, it is advisable to meet a credit counselor for credit counseling. There are many nonprofit credit agencies such as 'Consumer Credit Counseling Service' that help you out to formulate a debt repayment plan and provide debt counseling. Another option to improve your credit score, in case of high-interest debt, is to go for a debt consolidation loan.
Appearing for credit counseling is considered as a positive trait and the credit counseling references are removed from the credit report, once you are free of debt. This means there are no long-lasting entries of your debts, in your credit history.
A survey conducted by FICO reveals that the people who approach a professional credit counselor for help, have been able to repay the credit, without defaulting or filing for bankruptcy.
Prior to approaching a credit counseling agency, check out the authenticity and the credibility of the counseling firms. Do not pay the credit-counseling firms, unless your contract with them is over. A credit-counseling firm would have to give you a written statement about their terms and conditions and also the services offered by them.
Avoid Filing for Bankruptcy
Filing for a bankruptcy should be your last resort. Do it only if you are badly in debt and have many black marks on your credit. When you file for bankruptcy, you could lose 200 points. This would affect the credit score if you have a score above 650. However, if you have multiple delinquencies and lapses in your credit report and if you have score below 620, it would not affect you much.
When you file for bankruptcy, the credit score will fall below 620 and obtaining credit with a favorable rate would become difficult. In short, the credit would become more expensive. You would also need to understand, the credit report becomes blemished for next ten years.
Do not hesitate to meet a good and reputed credit counselor once you know you have a poor credit score and you are not in a financial position to repair it. Remember, if a credit counselor asks you to file for a bankruptcy, take time out to cross-check with another credit counselor. Many of the profit-making agencies would be keen on filing for bankruptcy than on helping you to apply for debt consolidation loan.
To sum up, take into consideration the points given above while trying to improve your credit score. Credit score can be improved if you are organized and disciplined enough to follow a stringent repayment plan.