March 15, 2011 12:28 pm - Posted by admin
This is a question that is always asked, “Now that my credit is ruined how can I repair it?” Before anyone can answer that question let us first understand how credit is measured and established.
How Your Credit Score Is Calculated
Credit scoring gives lenders a fast, objective measurement of your credit risk. This can help you get more credit at lower rates. FICO is the acronym for Fair Isaac and Company, the company that developed credit scores. It is the most widely used system to determine how likely you are to pay your bills.
How To Increase Your Credit Score
Build slowly and be smart. Improving your credit score will take time. And while each person’s individual credit profile should be managed in its own way, there are basic things that everyone can do to work toward healthy credit:
A. Improve your payment history
n Pay your bills on time. Late payments have the greatest negative effect on your credit scores.
n Get current on past due amounts.
n Don’t incur library fines, parking tickets or other penalties that seem unrelated to your credit.
B. Reduce your utilization rate (debt to credit ratio)
A higher credit limit could improve your credit score, but only if your charges don’t match it. Here’s why: The credit utilization ratio compares the amount of credit you’re using to your total available credit (total credit card balances ÷ total credit card limits). And it’s one of the many factors used to calculate your credit score. So having a low ratio—a low amount of debt with a lot of available credit—can help boost your credit score.
Also realize that canceling a credit card would increase your credit utilization ratio since you’d be reducing your total available credit, thus negatively affecting your credit score.
For example, assume you have six credit cards with a total credit limit of $30,000 ($5,000 each). Your total average outstanding balance owed has been $15,000 during the past year. That means you have a credit utilization ratio of 50 percent ($15,000 ÷ $30,000). You decide to drop two of the cards. Now your credit limit drops to $20,000; your ratio shoots up to 75 percent ($15,000 ÷ $20,000), and your credit score drops.
My suggestion: Keep your credit card balance at 35 percent or less of the available limit. If you must drop a credit card, make sure to pay down the others in order to keep your credit utilization ratio low.
Two other ideas that should help improve your utilization rate:
n Pay down all revolving debt rather than moving it around.
n Don’t open new accounts that you don’t need.
C. Increase your length of credit history
n Don’t open a lot of new accounts within a short time period. That move could make you look like a risky new credit user.
n Give yourself time. Time is one of the most significant factors that can build healthy credit. Establish a long history of paying your bills on time and using credit responsibly. You may also want to keep the oldest account on your credit report open in order to lengthen your period of active credit use.
D. Look for new credit sources
n Shop for the best loan within a fixed period of time, for example 30 days. That will distinguish you from someone continually searching for many new lines of credit.
n Avoid excessive inquiries. A large number of inquiries initiated over a short period of time may be interpreted as a sign that you are opening numerous credit accounts due to financial difficulties or overextending yourself by taking on more debt than you can easily repay. Apply for new credit in moderation.
n Opening new accounts and paying them off responsibly will boost your credit score.
E. Examine the types of credit used:
n Don’t open accounts with the thought that a better credit mix will improve your score. It probably won’t.
n Paying responsibly will give you a better track record than someone not having any credit cards at all.
n Closing an account doesn’t make its history go away. This can negatively affect credit score.