Option 1st Financial Blog

Top 5 Ways to Improve Your Credit Scores?

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So, What Are The Top 5 Ways to Improve Your Credit? 

Number 1: Well, number one should be no surprise, which is to make your payments on time. Are you aware that credit bureaus (i.e., experian, equifax and transunion) calculate 35% of your credit score based on your payment history?

Thirty-five percent (35%) of your credit score is based on your ability to make on time payments! That is significant, so, it is important that you make timely payments. Now, if you can't make a payment on the due date, make it within 30 days of the due date to prevent your creditor from reporting your payment as 30 days late to the credit bureaus (i.e., experian, equifax and transunion). One late payment can reduce your score substantially, effectively negating all the progress made from on time payments made over several months!

In this economy where unemployment is over 7%, many people are not in a position to make the minimum payment. If that description fits you or someone you know, contact the creditor to discuss payment arrangements. Whatever your situation, ignoring your creditors is not an option or your credit score will suffer more! When your credit score suffers, it costs you money because the interest rates from every purchase you make on credit, such a car, home, etc. will cost your more! 

Number 2: Attempt to lower your balances in relation to your limits. Ideally, you should keep your balances relative to your credit limits at thirty-percent (30%) or less. For example, if the total combined limit on your credit cards is $10,000, your goal should be to keep your balances at $3,000 or less on all cards. This demonstrates to creditors that you use your credit responsibly. As a result, creditors, such as lenders evaluating your credit when you apply for a home loan or refinance, will consider you to be a lower risk. Being defined as a lower risk borrower translates into better interest rates which saves you money!

So, we've reviewed the two biggest factors impacting your credit score: payment history (35%) and your limits relative to your balances (30%), so what's next? 

Number 3: The length of your credit history is the next biggest factor; it accounts for 15% of your credit score. The longer your credit history, the better, so do not close your accounts. If you pay off a credit card, cut the card up but leave the account open. However, a word of caution: in this economy, if your credit card is dormant for too long, your creditor may close the account. Creditors want to see activity on cards and a responsible payment history. I suggest selecting a bill that you can pay off every month; apply it automatically to your credit card and be sure to pay if off monthly! This will build your credit and improve your scores.

Number 4: The frequency with which you apply for credit is the next major factor. Inquiries made to your credit impact 10% of your score.

A credit inquiry occurs when a potential credit grantor, potential employer, rental housing agency, or other entity with a “permissible purpose” (as defined by the Fair Credit Reporting Act) requests access to your credit report. These inquiries are captured by credit reporting agencies and are retained in your credit report for approximately two years from the date of the initial inquiry. This does not include inquiries that you make. In other words, you can make inquiries but when others do, it has an impact on your score.

Here's a little unknown fact; you can actually contact Equifax to dispute credit inquiries and when you do, they remove the inquires. Experian and Transunion will not remove inquiries, meaning that inquiries will remain on your report for the full 2 years. It's amazing how the removal of several inquiries can move your score up several points. I speak from experience!  

So, we've gone over what impacts 90% of your credit score, so what factor influences the remaining 10% of your credit score?

Number 5: The final way to improve your score is establishing a balanced mixture of credit types. This should include a combination of installment loans and revolving accounts, and try to avoid finance companies because creditors view finance companies as higher risk. Call me for examples of finance companies (if you are not sure what constitutes a finance company), as I would imagine that these companies would not appreciate me posting their names on my blog.   

Car loans, student loans, and home loans are examples of installment accounts. Installment accounts have fixed terms and require regular payments. With an installment account, you owe a certain amount of money and have a fixed amount of time in which to pay it back. You must make monthly payments at a set amount which remains constant from month to month until the loan is paid in full.

Major credit cards and department store credit cards are examples of revolving accounts. Revolving accounts generally require a specified minimum payment each month that usually includes interest rate or service charge. These accounts provide a maximum amount that you can charge and allow you to carry a balance. The service charge or interest rate declines as the debt is paid off.

So, now you have the facts! What do you plan to do? I hope that if you have blemished credit or simply need to boost your credit scores, that you will take this information and act on it immediately! 

If you are not a homeowner but have a goal of becoming one, stricter lender guidelines require much higher credit scores compared to 12 to 24 months ago. FHA loans now require a minimum score of 600 (compared to 580 only a few weeks ago) and conventional loans require a score of 700 or above (compared to 580 12 months ago) or you will have to pay a premium for the rate. 

What is a premium? Well, let's say for example the interest rate is 5.0 percent; the lender may add 1, 2 or more percentage points to the 5.0 percent interest rate, depending on your credit score and other factors, such as the loan amount in relation to the value of the property because your lower credit score indicates that you are a higher risk for the loan. So, why the higher interest rate? Well, for one reason, if you are a higher risk, the lender wants to collect more of their money upfront in the form of a higher interest rate in case you default on the loan. 

This is a topic that I could write about at some length but I would imagine that I might loose your attention. Call if you need help implementing a strategy for improving your scores; if you want to talk about how to act on this information or simply have questions about any of the information contained in this Blog. 

Best of Luck!

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