Thursday, 1 December 2011

Raising Your Credit Scores

According to FICO, the factors that make up your credit scores fall into 5 main categories. The categories are listed below with a percentage reflecting the relative weight they carry in making up your credit scores.

Payment history - 35%

Amounts you Owe - 30%

Length of Credit History - 15%

New Credit - 10%

Type of Credit in Use - 10%

Note that of the categories above, the two most important are Payment History (past & present) and current debt load (Amounts you owe). That's 65% of the weight of all information taken from your credit history and is key factors used to determine your credit worthiness.

Payment History

Making payments on time, I would say, is the single most important thing in determining your credit scores. If you are 30-120 days late, this can impact your credit scores significantly. Opening payments on old collection accounts can bring down your credit scores as well because any payments you make will report late. If you're not able to pay in full on old collection accounts, then let the sleeping dogs lie.

Amounts you Owe

Balances under 50% of what you owe on credit cards tend to increase your scores, over 50% of what you owe, tend to drag your credit scores down. Others suggest not exceeding 30% of your credit limit. If you are in good standing with the credit card company, ask them to raise your credit limit. Most companies will do this for clients in good standing. The higher the limit to debt ratio, the higher your credit scores.

Length of Credit History

Make sure to keep your accounts open, revolving and current. Complete inactivity can reduce your credit scores drastically. I feel some of the worst advice for people getting out of debt is for them to close their accounts and cut up their credit cards. If you must cut up the credit cards, keep the accounts open and pay them down. If you are forced to close an account with a long credit history, try to balance it with opening an account with an equal or larger credit limit and low interest rate. This way you raise your credit worthiness, you keep your history going and kill your debt all in one blow.

Type of Credit in Use

Car loans and mortgages favor over a target card or payday loans. I'm not saying to go out and get yourself a mortgage or car loan to raise your credit scores. You should never take on more debt than you can handle. When it comes to qualifying for a home loan, your debt to income ratio weighs in as heavily as your credit scores (but that's a whole other article). Payday loans are frowned upon versus maybe a credit line with an outfit like Sears, Chase, American Express or BofA. With a payday loan just about anyone with a paycheck and a pulse can qualify versus the latter which requires more credit-worthy applicants. You may want to shy away from Capital One or Providian credit cards, which start you off with low credit limits and tend to keep you there. These credit cards are directed toward people with challenged credit, charge high fees, and are red flags to a creditor looking over a credit report. Secure credit cards with little or no fees, would be a better choice. To sum it up, be picky with who you open your trade lines with.

New Credit

New credit falls in line with type of credit. Opening a $5000 credit line with your bank, favors a $5000 payday loan. To sum this article up, pay down balances on credit cards under 50% preferably down to 30% or less of your credit limit. Keep accounts open and revolving every month, call your credit card company and ask them for an extended line of credit. Be choosy on who you open a credit line with, pay bills on time and keep them current. For those of you who are not able to acquire mortgages or car loans, pay your student loans and/or child support payments and keep them current. These are some things you can start doing immediately to impact your credit scores.

Keep in mind, high credit scores do not automatically qualify you for certain loans, which leads into my next article "Do High Scores Equal Good Credit"

David Phillips THE REFI GUY is your Real Estate Advocate for Consumer Knowledge @ was a loan officer for five years. The purpose of THE REFI GUY is to close the gap of knowledge between the public and professional finance world in a light and entertaining manner.

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