« How An Orchid Wedding Bouquet Can Ensure That You Get A Visually Stunning Wedding | Home | Car Insurance That Can Pay As You Go »
Fast Track To Good Credit Rating
By OnTopic | January 24, 2009
One may think the best credit rating is gained by someone who owes nothing and lives credit-free. However, the best loan candidates are people who have what is known as “good debt” and who continue to pay that debt off in a timely fashion. Mortgages, home equity loans, auto loans and student loans are all considered “good debt.” Your investment is likely to increase in value over time and you’ll encounter lower interest rates with these debts and you will have the opportunity to show your ability to be a reliable borrower over time. “Bad debt” is considered to be something that costs more than you can afford to purchase on a credit card. Understanding the difference between these two things is the first step in formulating a responsible plan to create clear credit.
Improving credit scores involves avoiding many things. In the order of importance, they are late payments, high credit card balances, closing credit card accounts and having too many in-store charge cards. Late payments carry 35% of the weight in terms of your credit score, so do not take them lightly, even if it’s just a store charge card, a cell phone bill or a rent payment. Your credit score can drop by as little as 20 points or more than 100 points, depending on how often you are late and how many accounts you’re late on, as well as whether you are 30, 60, 90, or more than 120 days late.
Secondly, your credit usage should be no more than 40% of what is offered to you. If your credit line is $1,000, then you should owe no more than $400, and that goes for all lines of credit you have open. If you have any maxed out cards, then pay them down until you hit the 40% mark! Some people think they should close out their accounts to “do the right thing” or “prevent overspending,” although this will decrease your overall credit offering and will reflect negatively on you.
Instead, work on paying those balances down and once you’re finished, aim to purchase one thing a year on those cards to keep them active, and pay them off right away. Lastly, opening and closing store charge cards just to get that 10-15% initial discount is a signal of irresponsible credit behavior and will not result in high scores for your credit.
There are also many things you can do to fix a poor credit rating. To get back on track, the first real step is, of course, paying down your debts. You’ll need money to get there, though, so you might have to pick up a second job, find a new job, work more hours or borrow a safety cushion from friends or family. You can’t dig out unless you have the funds to do so. Secondly, look at your monthly budget and figure out how much you’re willing to spend on all of your debts each month, allowing yourself an emergency fund cushion if you can. Then list your debts from lowest balance to highest balance, or lowest interest to highest interest, and begin by paying all minimum payments, with every extra penny going toward the highest rate balance. Once that one’s paid off, go to the next balance. The sooner your debts are paid off, the sooner you can begin thinking about how to improve credit scores.
There are some things on your free credit report that you don’t need to worry about, as they don’t really harm your credit rating. Sometimes, you’ll see an incorrect previous address, an outdated employer or a misspelling of your name. Often times, this is just a screw-up by someone in collections or a lender who mixed up the files and isn’t worth worrying about. Personal information like that doesn’t matter in terms of scoring. Also, don’t worry about closing credit inquiries since these have very low point values. In fact, closing out old accounts may actually hurt your credit score because it lowers the amount of credit extended to you.
Topics: Finance | No Comments »