Making a Good Credit Score Great

Credit scores are not a mystery. Just about everyone is familiar with them. They’re based upon your spending habits, how much debt you owe, how you pay your bills, how long you’ve been paying and a number of other factors. Your credit score (or “FICO score”) often determines if you will be able to get a loan for a home or a car, as well as the terms and interest rate you will pay. Your credit score is comprised of five basic components:

  • Making all of your minimum payments on time accounts for 35% of your credit score. You’ll want to really make sure you’re on top of this in all of your accounts.
  • The ratio of your debt levels to the amount of credit you have available accounts for 30% of your credit score. Even if you make all your payments on time, if you’re constantly right at your credit limit, this will adversely affect your credit score.
  • 15% of your credit score is based upon the length of your credit history. Obviously, this cannot be changed quickly or artificially. (This is why it’s basically impossible for a young person to have a perfect credit score.)
  • 10% of your credit score considers how many recent forms you’ve had for credit. The higher the number, the lower your credit score. (The reasoning is that people running short of cash tend to get started for more lines of credit.)
  • The final 10% of your score is determined by your credit mix, for instance, a home or car loan in addition to credit cards.

Having a good credit score can contribute to your financial success and help you to have access to even more credit. A good credit score demonstrates financial stability to lenders. However, in some cases, “good” just isn’t enough; in the current economy, it is more difficult than ever to get a loan. Lenders are more hesitant to lend to just anyone, and the screening process is much more stringent.

In some cases, merely having “good” credit won’t get you very far; many lenders are looking for excellent credit. But how can you move a good credit score from the realm of “good” to “great”? Knowledge is power, and when you know what affects your credit score, you can then take steps and make the changes that will have the most impact. Here are some steps that can help you improve credit score to its highest level possible:

  1. Monitor Your Credit Score: Check your credit report regularly for errors, fraud and forgotten bills — at least twice a year. Many sites provide this service for free. It can be difficult to dispute fraud or identity theft more than 18 months after they occur, so staying on top of your credit history is very beneficial. To do this, get copies of your credit report for all the major bureaus. Correct any errors and address any issues you find by contacting the appropriate creditor.
  2. Cancel Unused Accounts: Too much credit can actually be a detriment to your credit score. Beyond one or two long-standing major credit cards that are in good standing, take the time to close and cancel any superfluous accounts that you are not using.
  3. Use Credit, but Repay in a Timely Manner: To raise your credit score, avoid cash or debit purchases when you can securely pay in credit. Then pay off the balance as soon as possible. Each purchase and repayment is growing evidence of your creditworthiness. Building a history of purchases with timely repayment raises your borrowing level and credit score and while also lowering your interest rate.
  4. Pay Down Debt: Lower your debt levels as much as you can by paying down any large credit card balances. Ideally, your balances should be no more than 30% of your available credit. If you have any savings at all, use as much as you can spare to lower credit card debt. You can also request higher credit limits on your existing cards.
  5. Have a Major Credit Card: In order to raise your credit score to 700 or higher, you’ll need a major credit card like a Visa, MasterCard, American Express or Discover. If you don’t qualify for one, you can obtain a secured or pre-paid version with an initial deposit, which can later be converted to a traditional credit card after stable, regular use is proven.
  6. Arrange for Automatic Payments: Your payment history is considered closely when you are being assigned an interest rate. Paying bills on time shows your ability to purchase responsibly. Automatic payments will ensure that you never forget to make a payment, and paying higher than the minimum shows creditors that you are responsible and reliable. Remember that even one late payment can hurt your credit score. Set up a payment amount to keep you from ever making late payments. You can also create multiple payments throughout the month to keep your balance close to zero. Then when your bill comes, just pay off whatever is left.
  7. Consider Your Credit Mix: If your credit report shows just credit cards, you’ll want to improve your credit mix. Ask other creditors to report your information to the bureaus. Creditors like student loan lenders, local retailers and credit unions aren’t required to report credit information, but you can ask them to. (Don’t buy a car or luxury item just to improve your credit mix score!)
  8. Length of Credit History: If your credit history is not very long, you can revive old accounts you haven’t used in a while. That way, they will be reported to the bureaus and can improve the length of your credit history and your score. One transaction in every six months is enough for an account to be considered active.
  9. Favor Cash Before Applying for a Large Loan: To ensure that your balances are reported as low to the bureaus, start using cash as much as possible in the months leading up to get starteding for a loan. You can also go online to check your balances before the statement period ends; pay it off early in order to avoid having your balance reported at its highest.
  10. Shop Smart: If you’re shopping for a mortgage or other large loan, try and do all of your rate shopping within a short period of time. That way your credit won’t be dinged because of multiple credit inquiries.

These are ten ways to help you raise your credit score from “good” to “great.” Follow these simple steps, and you’ll start seeing your credit score rise in no time!

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