You want to buy a home or refinance to today’s record low interest rate. But you can’t because your credit score isn’t high enough. Do not despair. Credit scores go up and down in direct relation to certain key financial behaviors. They don’t change overnight, but if you start now, you could improve your credit sufficiently to qualify for that loan you want before rates go much higher.
1. Lower your credit utilization ratio
Notice that I didn’t say “reduce your debt.” Having low debt is, indeed, a critical element of good financial health. So you should pay down your balances as quickly as you can. But this part of your credit score is not exactly based on how much debt you carry. It’s based on how much debt you carry in relation to your total available debt.
Credit scores go up and down in direct relation to certain key financial behaviors. Let’s say you have three credit cards, a combined credit limit of $10,000 and a combined balance of $5,000. Your credit utilization is 50%. You want it to be 10% or lower. If those same three credit cards have a combined credit limit of $25,000, the same $5,000 balance results in credit utilization of 20% – a huge improvement. So you can improve your credit utilization ratio to some extent without paying down your balance at all if you call up your card issuers and request higher limits. Then resist the urge to make new purchases.
You don’t have to apply for new credit if you have old, unused credit accounts that you can resurrect. The age of your accounts is another factor in determining your credit score, so bringing a dormant account back to life can benefit your credit score in more than one way.
2. Avoid applying for new revolving credit.
Even though a high combined credit limit is good, that doesn’t mean you should go out and apply for new credit cards that you don’t intend to use. Every time you apply for new credit, the lender’s inquiry shows up on your credit report and could ding your score. Multiple inquiries almost always ding your score. (One notable exception is that when you are shopping for a mortgage you can apply with several lenders within a 45-day time frame and they will be treated as a single inquiry on your credit report.) Also, many of us have a hard time resisting the urge to use a new card. The road to bankruptcy is often paved with great intentions to pay off charges.
3. Add an installment account
Even though you should be very conservative when it comes to seeking new revolving credit (see above), an installment account (like a car loan or small personal loan) can really boost your score. The reporting agencies want to see that you can handle both kinds of credit and that you are responsible when it comes to paying off your debts.
4. Set up automatic payments
Even one late payment can set off an avalanche of undesirable consequences. Some card issuers will immediately subject your entire balance to a “penalty rate” much higher than your current interest rate. Penalty rates are usually a permanent consequence. You’ll also pay late fees. And of course, the late payment will be reported to the credit bureaus and will likely be visible on your credit report for years. Avoid the issue altogether by setting up automatic payments.
5. Correct errors on your credit reports
MSN Money recently reported that 1 in 5 consumers have errors on their credit reports. The credit reporting agencies insist that most of the errors (like various misspellings of your name or outdated employer information) are not significant enough to affect the person’s score. The only way to know is to obtain a copy of your credit report from each of the three credit bureaus and examine them for errors. (AnnualCreditReport.com is the only site authorized to provide those free copies each year.) In general, you can dispute any item simply by clicking on it while you’re viewing your report online. The FTC suggests that you submit all requests for corrections in writing and by certified mail – you can certainly escalate to this level of effort if your first effort is unsuccessful. The Wall Street Journal offers a few more tips here.
Don’t pay a service that promises to fix your credit. The only way to do that is to engage in responsible financial behavior and diligently monitor your credit reports. Follow John Ulzheimer on Credit Sesame for weekly tips related to your credit score.
Mortgage Capital Associates (MCA)
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