What Affects Your Score & How to Improve It

Your Credit Score-What Affects It & How to Improve It

If you're trying to raise your credit score to get a good rate for a home purchase, a refinance, a HELOC, or even a consumer loan like a vehicle, you might be surprised by what affects--or doesn't affect--your score.  You have to keep your credit score up in case you need a loan for almost any financed purchase and also… surprise…to get the lowest premiums on your homeowner’s insurance. Here's the 411 on how various money management tactics impact your credit score.
  • More money improves your credit score? False. Your level or sources of income don't affect your credit score although lenders may look at it when making loan decisions, according to the Fair Isaac Corp., the company that issues the commonly used FICO credit scores.
  • Ownership of several credit cards can hurt your credit score? Mostly false. Having many credit lines isn't necessarily a bad thing because multiple lines give you a favorable debt-to-available-credit ratio. But, you must use them correctly: It's best to keep any balances below 10% or 20% of the total credit line. Anything more will affect the ratio of debt-to-available-credit which can decrease your credit score.
  • Opening credit lines can hurt your credit score. True. New credit applications can decrease your credit score so be careful about applying for new credit cards or personal loans before applying for a HELOC, second mortgage, automobile loan, or other large line of credit.
  • Closing credit lines can hurt your credit score. Surprisingly True. Closing existing credit lines may also hurt your credit score since it'll damage your debt-to-available-credit ratio. A good rule is not to make any credit changes in the months leading up to a major credit request.
  • Consolidating credit lines will help your credit score. Mostly false. Although it may seem like a good idea to move all your balances to one card, doing so can actually hurt your credit score since your debt-to-available-credit ratio will spike on that card. However, such a slight decline isn't necessarily a deal-breaker for a loan especially if the card has a lower interest rate and will allow you to pay off the balance sooner. Your score will increase as soon as that ratio goes down.
  • Changing jobs can hurt your credit score. Partly true. Taking a new job or losing your job doesn't affect your credit score however, if you have a spotty employment history, lenders may hold that against you in making a loan. Dips in income may signal that it could be difficult to pay bills in a timely manner.
  • Co-signing for others can hurt your credit score. Partly true. Simply co-signing on a loan for someone else may not affect your score, but if that person is late paying the loan, it's likely to show up on your report and that's a nasty surprise if you didn't know the person was late.
  • Judgments and liens aren't considered in your credit score. False. If you've had a judgment or lien filed against you it's considered in your payment history which represents 35% of your score. Similarly, while most utility companies don't report payment history to credit bureaus, your account will likely be reported if it is seriously delinquent and referred to a collection agency.
Additional details on how to manage your FICO score are available on the FICO site (http://www.myfico.com/crediteducation/whatsinyourscore.aspx). OK, so now that we know what things affect your score, let’s learn about how you can clean up your credit:
  • Know your credit score. Credit scores range from 300 to 850 and the higher, the better. They're based on whether you've paid personal loans, car loans, credit cards, and other debt in full and on time. You'll need a score of at least 620 to qualify for a home loan and 740 to get the best interest rate and terms. You should know that you're entitled to a free copy of your credit report annually from each of the major credit-reporting bureaus, Equifax (http://www.equifax.com), Experian (http://www.experian.com), and TransUnion (http://www.transunion.com). Plus, you can access all three versions of your credit report at www.annualcreditreport.com (http://www.annualcreditreport.com). I strongly encourage you to review them annually to ensure the information is accurate.
  • Correct errors on your report. If you find mistakes on your credit report which happen to everyone (sometimes frequently), write a letter to the credit-reporting agency explaining why you believe there's an error. Send documents that support your case and ask that the error be corrected or removed. Also write to the company or debt collector that reported the incorrect information to dispute the information and ask to be copied on any materials sent to credit-reporting agencies.
  • Pay every bill on time. You may be surprised at the damage even a few late payments will have on your credit score. The easiest way to make a big difference in your credit score without altering your spending habits is to diligently pay all your bills on time. You'll also save money because you'll keep the money you've been spending on late fees. You might not know it but even a small blemish on a credit report can cost you at a home closing closing. I know of one person who hadn't paid a $40 cell phone bill charge. The unpaid bill was turned over to a collection agency and ended up damaging his credit score. Because of that one small unpaid bill, the interest rate on the couple's mortgage was 0.25% higher than if he had had a clean score and the cost? $13,000 over the life of the loan. The lesson? Even small items can damage your financial position. Get your credit report several months before considering a major purchase to see if there's anything damaging. If so, get it cleaned-up immediately or you might find that you will have to postpone your purchase while the credit reporters get your file straight….and they are notoriously slow in doing so.
  • Pay your mortgage-now. Not all late payments are created equal! Almost nothing hits your credit score harder than a late mortgage payment. Payment history generally accounts for 35% of your credit score which is bad enough, but credit score agencies consider late home payments graver than late credit card or car loan payments.
  • Use credit carefully. Another good way to boost your credit score is to pay your credit card bills in full every month. If you can't do that, pay as much over your required minimum payment as possible in order to begin whittling away the debt. Stop using your credit cards to keep your balances from increasing and transfer balances from high-interest credit cards to lower-interest cards.
  • Take care with the length of your credit. Credit rating agencies also consider the length of your credit history. If you've had a credit card for a long time and managed it responsibly, that works in your favor. However, opening several new credit cards at once can lower the average age of your accounts which pushes down your score. Likewise, closing credit card accounts lowers your available credit so keep credit cards open even if you're not using them.
  • Don't use all the credit you're offered. Credit scores are also based on how much credit you use compared with how much you're offered. Using 100% of $1,000 in available credit will give you a lower score than having $1,000 of available credit and only using $100 of it. Occasionally opening new lines of credit can boost your available credit which also affects your score positively.
  • Protect your mortgage to protect your insurance rates. Late payments on your mortgage may also affect your homeowner’s and automobile insurance rates, potentially costing you hundreds of dollars a year.. Insurers may assume that if you're strapped for cash and pay your bills late, you're more likely to file a claim because you need the money.
  • Be patient. It can take time for your credit score to climb once you've begun working to improve it. Keep at it because the more distance you put between a spotty payment history and your current good payment record, the less damage you'll do to your credit score.
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