Credit scoring systems have been around for decades. They gained popularity in the 1980s as a way for lenders to quickly evaluate an individual's creditworthiness and over time proved to be a valuable predictor of financial risk. Today, credit scores are used not only by lenders, but also by insurance companies, landlords, employers, utility companies, and even the legal system. High credit scores can mean lower interest on loans and insurance premiums. Low credit scores can make it harder to qualify for a loan and cost you more in interest. Phone and utility companies may ask for higher deposits from customers with low credit scores. These are just a few reasons why it's important for you to understand how your credit score is calculated and what you need to do to boost it as high as possible.
There are many credit scoring systems in use today. Lenders and credit reporting agencies may use different credit scoring models for different purposes. The basic credit scoring formula considers your payment history, outstanding debt and available credit, credit account history, recent inquiries, and the types of credit you have. Keep in mind that it takes longer for positive items to affect your credit score than it does for negative items. For example, paying your bills on time could take six months to a year to cause your score to improve significantly, but late payments might have a negative impact in just a few months.
These tips can help boost your credit score:
o Check your credit files for accuracy. Credit reporting agencies are not infallible. Check your credit files with all three of the major agencies (Equifax, Experian, and TransUnion) and correct any mistakes immediately. Once you have your credit files accurate, check them at least once a year to be sure they stay that way.
o Pay your bills on time. This simple advice is the most critical, because more than one-third of your score is based on your payment history. If you're behind on any bills, catch up and stay current. If you are having trouble making on-time payments because your bills come due on a date that isn't compatible with your income pattern, call your creditors and ask to change the monthly due date. Most will be willing to work with you.
o Keep credit card balances low. Maxing out credit cards can cause your credit score to plummet. A good target is to use only about one-third of your available credit. If you have a credit card with a $ 5,000 limit, keep the balance at $ 1,650 or lower. If your balance is higher, ask for a credit limit increase but don't use that new available credit for purchases-just let it help you improve your credit utilization ratio.
o Don't close old accounts. Creditors like to see longevity, so you may not want to close old accounts. If you have a reason for wanting to reduce the number of open accounts, close newer ones instead.
o Don't open new accounts that you don't need. New accounts lower your average account age, which could lower your score. Resist marketing pitches such as stores that offer discounts on that day's purchases if you open an account. Of course, if you have a valid reason for opening a new account, then you should do so. But weigh the potential impact on your credit score with the benefit of having the account before you take any action. If you need additional credit, it is generally better for your credit score for you to increase your credit line with an existing account than it is to open a new account.
o If you are in the market for a new loan, such as for property or a car, do your shopping within a short period of time. Too many inquiries by creditors or lenders can reduce your credit score, but most credit scoring systems distinguish between a search for a single loan and a search for many new credit lines in part by the length of time over which the inquires occur.
o If you have bad credit or no credit, open a few new accounts, use them responsibly, and pay them off on time. This should gradually increase your score.
o Pay attention to things you thought didn't matter, such as unpaid parking tickets, library fines, and other fees. Rather than writing these debts off, many local governments are turning them over to collection agencies. An account that goes into collection, even for a small amount, can drop your score up to 100 points. Some credit scoring systems ignore delinquencies on accounts when the past-due amount is less than $ 100, but most don't.