You probably thought once you graduated from school you would be done with report cards. In the adult world, a new type of report card determines whether you?ll be ?grounded? or not- it?s your credit report. If your credit score doesn?t meet the ?grade?, creditors will ground you and either completely refuse to lend you money or lend you money at extremely high interest rates.
Credit scores are used to measure the probability that you?ll be able to repay the money that you owe, and the score is determined by the information found within your credit report. When you have a top notch credit score, you?ll be rewarded with better interest rates and qualify for more loans- so buying that new car or home can be possible.
Lenders rely on the FICO score through the Equifax credit bureau most often, but there are other credit scores available from Experian and TransUnion credit bureaus as well. You are able to purchase your score at any time so you know where you stand when shopping for a loan, and it?s a good idea to review your credit score and credit report at least twice a year to make sure the information is correct and updated. (You can receive one report from each credit bureau within each 12 month period for free; although FICO scores must be purchased.)
There are 5 things that you can do in order to help improve your creditworthiness and boost your credit score.
Correct mistakes. If there are mistakes and errors in your credit report, chances are your credit score is reflecting a lower score than you should have. Review your credit reports one to two times each year to make sure there are no mistakes on your report.
Be on time. You should make an effort to be on time with your payments all the time, however, if you know you?ll be shopping for some type of credit in the near future, it?s imperative that you make prompt payments in the months close to the time when you will be applying for credit. Recent late payments and missed payments effect your score much more than those that were made several years ago.
Reduce your credit. The FICO score depends a lot upon how much money you owe on credit cards in relation to how much credit you have available to you. A general rule is to try and keep your balances below 25 percent of your total available balance for higher credit scores.
Pay off instead of transferring balances. Many people believe that transferring a balance from one credit card to a new one, and then closing off the card is a good way to increase their credit scores, but that?s not exactly true. When you close one card, you?re actually lowering the ratio of available balance to used balances, and that is likely to lower your credit score. If you?ve got a credit limit on 4 credit cards of $8,000, and you owe a total of $2,000 that?s 25 percent of your available credit. If you transfer all the balances onto two cards and cancel your other two cards, your total credit available is now only $4,000 and you owe $2,000- which means you are using 50 percent of your available money and suddenly your credit score is going to decrease.
Keep your unused credit card accounts. If you know you?re going to be applying for credit of some type in the near future, don?t close any of your unused credit card accounts. When you close them, you?re reducing your available balance. Don?t open any new accounts before applying for a loan if you can help it, because having a short credit history on an account lowers your score because there is no real track record of your payments. Having new accounts will also lower the average age of your credit accounts- another large factor of your FICO score.
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