Credit Card Education Guide

How to Improve Your Credit Score

When you apply for credit, the lenders use your credit score as a guideline to determine your creditworthiness. The credit score is based on your credit report and calculated into a three digit number ranging from 300-850. This calculation is developed by the Fair Isaac Company and is called the FICO score.

The credit score has a significant impact on many of the big financial decisions you will be making throughout life. Not only does it affect your ability to get credit, but also influence the rate you have to pay on your mortgage, car loans, credit cards and also the premium on your insurance policies.

A higher credit score means the lenders see you as a lower risk, which means increased likelihood of being approved for credit and lower rates. Different sections of your credit report are weighted differently by FICO in the calculation method and knowing how the score is calculated could help you take the necessary steps to improve your credit score.

Payment History

The most important factor to lenders is whether you pay your bills or not and this is 35% of your score. All late payments reported to the credit bureaus will have a negative impact on your score and the severity is determined by how long it has been past due, the amount owed, and number of items past due. As time goes by the affect will lessen and eventually drop off your credit report after 7 years.

Make sure to pay all your bills on time to maintain a good credit score, because time is the only way to a better score once the damage has been done. It is recommended to check your credit report occasionally for erroneous reporting of late payments and collections and dispute errors with the credit bureaus.

Outstanding Debt

The amount of debt you have compared to your credit limits is called credit utilization and the closer you get to your credit limit the higher is your utilization, which results in a lower score. The actual amount that you owe and the type of loan also have an impact and overall the debt accounts for 30% of your score.

In order to minimize the effects of outstanding debt you have a couple of options. You can either rearrange credit card debt through balance transfers to lower utilization on a card or request a credit line increase with the credit card company. When the credit bureaus receive the new information about your debt situation, it will be immediately reflected in your credit score.

Length of Credit History

Time is the most reliable indicator of the likelihood that debt will be repaid. When a person has paid the outstanding debt consistently for year, the lenders realize that there is a good chance the payments will be made on time for future loans. 15% of your score is based on the length of your credit history.

To obtain a credit history you can prepare by applying for credit cards for people with no credit history and make sure to pay this credit card bill on time. Another possibility is to become an authorized user on your spouse or parents credit card and you will instantly inherit their payment history and the age of the account.

Credit Inquiries

Every application for credit results in an inquiry on your credit report. A large number of inquires could mean that you are in financial trouble, because you are actively seeking a number of credit lines. Inquiries accounts for 10% of your credit score.

Inquires affects your credit score for one year, but will stay on your credit report for two years. The number of inquires can be limited by knowing your score and only applying for credit that match your credit rating.

Types of credit

If you have a mix of revolving credit such as credit cards and installment credit such as a mortgage it has a positive influence on your score. Several types of credit indicates experience in managing your credit, but it only accounts for 10% of your score and opening another type of credit for the sake of improving your credit score is not recommended.