How to improve your credit score
Understanding the importance of your credit score and how to keep it high can save you a lot of money in interest and could even help you get a job
Despite the importance placed on credit scores in determining how much credit a lending institution can risk loaning you either directly
or by giving you a credit card most Americans know little about them. This is quite alarming when you consider how important your credit
rating, also known as a credit score, can be when you need to borrow money. In addition to loan qualifications, credit scores are sometimes
used as a factor in establising your insurance rates. Studies have shown that people with higher credit ratings are more responsible, safer
drivers and submit fewer insurance claims.
The opposite can apply when you are seeking employment. Some employers review credit ratings when
considering applicants. A low credit score could indicate that you are less responsible and more likely to be a poorly performing employee.
Credit scores are also carefully scrutinized when someone is renting a house or apartment because people with higher scores not only make
better neighbors, they pay their bills on time. So you see, your credit score is all about risk assessment and your ranking can influence
your life in many ways. Having a high credit score can mean everything from paying lower interest rates to paying lower car insurance
premiums to landing that dream job and there are steps you can take to improve your credit score.
Who keeps track of my credit rating?
There are three major credit bureaus: Experian, Equifax and TransUnion. The credit bureaus write up your report based on any information they received about you from companies that gave you credit in the past, such as your payment history, the length of your credit history, the types of credit you have and amounts owed.
From that report, a credit score is derived -- which ranges from 300 to a perfect 850.
What your credit score is used for
That score is a quick way for lenders to assess how risky you are as a potential borrower. The higher your score, the less risk you pose to lenders and the more likely it is that you'll get their best available rates.
Consumers with scores above 700 are usually charged relatively low rates, and those with scores above 760 are charged the lowest rates.
Consumers with scores below 600 are typically charged relatively high loan rates, and if your credit score is really bad, you may be not be able to borrow at all.
Any late payments you made will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your score.
Beth Givens, director of the Privacy Rights Clearinghouse, says, ideally, you want your score to be well above 620, that's a drawing line for creditors. (The median credit score in the United States. is 723.)
Credit card provider Providian Financial estimated that consumers with an average score would reduce card finance charges by $76 annually if they raised their score by 30 points.
"If [all] consumers were to raise their credit scores by only 30 points, on average they would save $16 billion on lower credit card finance charges alone," said J. Christopher Lewis, Providian's chief public policy officer.
Under the Fair and Accurate Credit Transactions Act , you can obtain one annual free copy of your credit report. For more information visit www.annualcreditreport.com or call 877-322-8228. But you will still have to pay a fee to get your scores.
"Those who have obtained their scores know significantly more about credit scores than those who have not," noted CFA's Brobeck.
And once you know your score, you can follow these tips to improve your rating:
- Pay your bills on time. Delinquent payments can have a major negative impact on your score and the longer you pay your bills on time, the better your score. For example, someone with an average credit rating of 707 can raise their score by as much as 20 points by paying all their bills on time for one month.
- Keep balances low on credit cards. High outstanding debt can affect your score. Maxing out your credit cards could lower your average score by as much as 70 points.
- Don't open a number of new credit cards that you don't need. New accounts will lower your average account age, which could actually lower your score by up to 10 points.
- Have credit cards - but manage them responsibly. In general, having credit cards and installment loans (and making timely payments) will raise your score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.
- Closing an account doesn't make it go away. A closed account will still show up on your credit report and may be factored into the score.
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