During hard economic times, banks and other lending institutions tighten their lending requirements to minimize risk. Even if you do get credit, your score can make a big difference in the interest rate you may get, as this loan savings calculator shows.
Therefore, it is very important that you keep an eye on your credit history and scores and work to improve them any way you can. The formula that FICO (Fair, Isaac, and Co.) uses is proprietary and secret, so there are no "silver bullets" for gaming the equation to raise your score. You should keep an eye on:
- Payment History
- Amount Owed
- Length of Credit History
- New Credit
- Types of Credit
Following the tips below should give you an edge in getting, and keeping, good credit.
This information constitutes 35% of your credit score, so maintaining it is very important. Make sure you pay your bills on time, as late or missing payments, along with collections, can seriously impact your score. Thus the longer you pay your bills on time, the better your score.
If you just can't make the payments, contact the creditor and see if you can work something out, or consult a reputable credit counselor. You should also be aware that once a debt reaches collection, and is reported that way, paying it off will not remove it from your credit history; it will still remain there for seven (7) years.
Your overall debt load constitutes 30% of your credit score, so managing this, along with your payment history, gets you almost two thirds of the way there. Naturally, the biggest thing you can do is keep your balances as low as possible on all of your credit cards and any other kinds of "revolving debt."
Do not carry a balance if possible; only charge on credit cards what you can pay off when the bill comes in and be sure to pay it on time. Do not have more than one credit card; (or at least as few as possible) owing the same amount, but on fewer accounts (or just one) may lower your score.
If you have more than one card, do not close out unused ones as a "quick fix." Also, do not get more credit cards "just in case" because, even if you do not use them, they could actually lower your score.
Length of Credit History
This information is 15% of your score. This, naturally, is a measure of how long you have had credit. One of the things that goes into it is the average age of your credit accounts. Therefore, you should not open several new accounts over a short period of time, especially if your history does not have much other information about you.
Also, a lot of usage of those accounts (charging activity) if you are a new credit user can look risky to any potential lender looking at your report. What looks good is a long, rich credit history with manageable balances in the accounts and good payment records.
This information is 10% of your score. From this point forward, any new credit incurred should be dealt with responsibly in order to show lenders the other side of that "new leaf." Do not borrow more than you absolutely need, and pay them off on time. This will raise your score in the long run.
You should also be focused in your search for credit. FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.
You should also bear in mind that credit inquiries by several lenders in a fairly short period of time can hurt your score; however, it is all right to check your own, as long as you order it directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.
Types of Credit
This makes up the remaining 10% of your score. To keep this positive, you should only apply for and open the accounts that you need; don't open different types to create a good "mix," because it probably will not raise your score.
You should also bear in mind that once you open them, closing them later will not necessarily help you. A closed account will still show up on your report and may be considered by the score. It is okay to have credit cards, as long as you handle them responsibly.
If you keep the balance low and make timely payments, you will appear as a less risky credit prospect than someone without them, and raise your credit score.
So Check Your Credit Today!
You are entitled to a free copy of your credit reports (all three) once a year, or if you have been turned down for credit, although the FICO scores themselves may not be free.
You should also be wary of companies offering a "free" copy of your report, when it really only comes without charge if you sign up for a service. Try this one instead: Annualcreditreport.com. Use this information wisely, along with the tips above, to try and keep your credit in the best shape possible!
Finally, believe it or not, bankruptcy may help! If you have a lot of debt that you cannot repay, that may be the weight that is keeping you underwater. To find out whether bankruptcy would be a good option, download my free book, Am I In Too Deep? A Guide to Knowing When You Need to File Bankruptcy in New Jersey for more information.