How To Improve Your Credit Score

How To Improve Your Credit Score
Jim Collins

One of the first and most important things to consider when you’re looking to make a big purchase, such as buying a home, is your credit score. It can make or break your purchase. To avoid being turned down for a loan, it would benefit you to know your credit score and things you can do to improve it.

Credit score explained.

A credit score is an individual rating that gives banks and lenders an idea of how well you’ve managed your loans in the past; giving them a way to assess their risk of lending. A high score, within a 650 to 900 range, is what lenders are looking for. In particular, a score of 700 or higher is best. The lower your credit rate, the higher the risk for the lender, which means you may be charged a higher interest rate. 

Your score is reported to a credit bureau from lenders such as banks and credit unions, retailers and credit card companies. In addition to the rating is your credit report, which gives a more detailed retelling of who you’ve borrowed from, how much you owe and more.

In trying to obtain a mortgage, major banks and prime lenders are looking for borrowers with a credit score between 650 and 900. If your credit history is a little shaky and you have a score between 550 and 650, you’re more likely to be able to obtain a mortgage through a trust company, like Home Trust, but with a higher interest rate. If your credit is bad, with a score lower than 550, you still might be able to obtain a mortgage, but through a private lender. That’ll come with a higher interest rate.

How your score is determined. 

Your credit score is determined by a variety of factors. One of the most important factors in how your credit score is calculated is your payment history; that is if you’ve missed payments, paid bills late, had bankruptcies or any accounts overdue. 

Other things considered is how much debt you have used in relation to your available credit; how long you’ve had a credit history; how often you’ve applied for credit; and what types of credit you have. 

What you can do to help your credit score.

There are several things you can do to start improving your credit score: 

Request your credit score and/or credit report from one of the credit bureaus, TransUnion or Equifax. You are allowed one free copy of your credit report a year. You can also see your credit score as much as needed, but for a small fee. Also, it is not uncommon for a credit report to have errors. Make sure to check for any mistakes on your credit report and seek the appropriate avenues to have it corrected. 

Use no more than 35 percent of your available credit. For example, if your available credit on a card is $6,000, try not to have a balance of more than $2,100, which equals 35 percent. 

Think long term. When it comes to credit history, the longer it’s been established, the better. If you have older credit cards that you rarely use, if ever, consider keeping them open rather than closing the account. It helps your credit look better that it’s open and paid off. 

Vary your types of credit such as with a credit card, car loan, a line of credit, etc. 

Pay your bills on time. Pay at least the minimum payment and pay off your loans, if possible. 

Keep your balances low. The higher your balances, and the more balances you have, the more you look risky to a lender. 

Limit your credit inquiries. It makes it look like you’re living above your means, if you have requested credit too often. Apply for credit only when you really need it.

Understanding credit and being proactive about your own is a sure way to find success. It may take time to build good credit, but that new house can be right around the corner.