12 March 2012
Ten Ways to Improve Your Credit Score

Your credit score may determine whether or not you get approved for financing on large purchases such as furniture, autos, and even a house. That three-digit number also determines your interest rates and fees, your financing arrangements, and your credit limits. Bottom line – it’s in your best interest to take steps to raise your score.

Understanding Your Score

Your credit score is derived, using complex analytics, from information provided by the three major credit-reporting agencies: TransUnion®, Experian® and Equifax®. Ranging from 300-850, your credit score is a calculation of what kind of a credit risk you may be – the higher the number, the lower the risk.

According to FICO™ (the Fair Isaac Corporation), which calculates credit scores, the following categories make up your score (in order of importance):

  • Payment History (35%): Delinquencies, past-due items on file, adverse public records like bankruptcies, etc.
  • Amounts Owed (30%): How much debt you carry, numbers of accounts with balances, proportion of credit lines and installment loans
  • Length of Credit History (15%): When accounts were opened, time since account activity
  • New Credit (10%): Numbers of recently opened accounts and credit inquiries, re-establishment of positive credit
  • Types of Credit Used (10%): Number of various types of accounts (credit cards, retail accounts, installment loans, mortgage, etc.)

Your credit score takes all of these factors into account, meaning that no one factor alone will determine your score. For example, a bankruptcy, which can remain as long as 10 years on your credit report, can greatly affect the payment history component of your credit score, but it only tells a portion of the story. Additionally, other information may be considered in determining your score, such as your longevity at your present job, or the kind of credit you’ve requested. Factors not affecting your credit score are your race, age, interest rates, place of residence, salary, occupation, credit counseling involvement and other personal information.

10 Ways to Improve Your Score

  1. Scour your report for inaccuracies and take steps to correct them.
  2. Because payment history has the biggest impact on credit, this is where you can make the biggest impact. Pay bills on time! Set payment reminders through your bank or creditors, or set up automatic payments.
  3. See a credit counselor if you’re having trouble paying down debt, or contact creditors to make a payment arrangement.
  4. Keep balances low on credit cards or “revolving credit.”
  5. Pay off debt instead of moving it around or transferring balances.
  6. You need to have credit cards! If you don’t have one, get one. Open them only as needed and use them wisely.
  7. If you don’t already have one, consider adding an installment loan (auto, mortgage, student loan) to your credit mix.
  8. Pay off credit cards before paying off installment loans; this has a greater impact on your credit score.
  9. Try to limit credit card charges to 30 percent or less of the card’s limit (aim for 10 percent).
  10. Don’t close unused accounts. Your debt-to-credit ratio is what affects your credit report, not your interest rate, so even if your interest rate is high, it’s best to keep the card open and refrain from using it.

In 2004, the U.S. Public Interest Research Group found that nearly 80 percent of credit reports contained inaccuracies; a quarter of them included mistakes that could cause denied credit. Considering that negative information can remain on your credit report for up to seven years, you can see why it’s crucial to check your credit report (AnnualCreditReport.com) once a year to ensure against inaccuracies. Checking your own report is free (once a year) and does not count as a hard inquiry, so it doesn’t affect your score.

In general, according to Craig Watts, Consumer Affairs Manager for FICO, “The mantra for getting a great score is, ‘pay your bills on time, keep account balances low, and take out new credit only when you need it.’”

The information contained herein may not represent the views and opinions of Nevada State Bank or its affiliates.  It is presented for general informational purposes only and does not constitute tax, legal or business advice.

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