Navigating what makes a great credit score can sometimes feel like being on the ocean during a storm. There’s a lot of people willing to give you advice and not a lot of solid information to draw from. The companies that produce the FICO score are very secretive about how exactly they calculate your scores, but they are upfront about certain things, one of them being credit utilization, or more accurately, debt-to-credit utilization.
It is widely known that there are three types of credit: mortgage, installment (cars, student loans), and revolving. Revolving limits change monthly, hence the name revolving, and are not fixed like mortgage and car loans. The consumer has a choice of how much they use from month to month, and because of this, roughly 33% of your credit depends on how you use those little plastic temptations we call credit cards.
A consumer advocate for the CFP Board of Standards, Eleanor Blayney, says that ideally, a person should use between 10 and 30 percent of what’s available to them on their total credit limit.
For example: let’s say you have one thousand dollars available to you on your credit cards (having two $500 limit lines). If you are carrying over more than $300 on a monthly basis, you are over the optimal ratio. If you carry $500 or more monthly, your ratio is 5-10, or 50%, and this is where you look riskier to the credit agencies.
Think about it for a moment, would you rather loan money to someone who barely uses the credit they have available to them or someone who is consistently using more than half of what they have available? More use looks like more risk, and this accounts for a huge portion of your FICO.
Think of it like a speed limit. Keep it under thirty, or the FICO police will cite you with their sentence of bad credit. KEEP it UNDER 30
Financial times have been hard. Record numbers of people have had credit problems including bankruptcy. Most people have issues trying to rebuild credit after having financial issues. The number one question people have when trying to recover from bad financial issues is how to improve credit rating scores. There are a number of simple steps that people can take to improve credit scores, without hiring outside agencies. There are five simple steps to help improve credit rating scores.
Get Caught Up with Consolidations
People often underestimate how devastating late pays and no pays are on credit reports. Make sure that all bills are caught up. Unpaid bills can add up and create horrible financial situations. Any delinquent bills should be caught up quickly. Even debt consolidation loans are helpful if the consolidation is done at a lower interest rate than current debts.
Low Balance Credit Cards
People often think that credit cards are part of the problem. Unrestrained use of a credit card is often detrimental to credit. Use credit cards to pay off low bills that can be immediately pay off. This shows active payments of a credit line and can improve credit scores dramatically. It is important that all payments are made in a timely fashion or the impact is negative.
Pull Credit Reports
People should examine credit reports on an annual basis. Credit agencies and debtors can make mistakes. Sometimes debts are reported on the wrong person’s credit report. If no steps to challenge incorrect reporting, it can cause damage to credit until it is resolved. Pulling credit reports may also serve as alerts to bills that had been forgotten. If a debt is found and is valid, contact the debtor immediately to make arrangements. Often misunderstandings are reported and can help prevent some of the negative impacts.
Small Personal Loans
Loans from banks are excellent ways of increasing credit. People with low credit scores should expect higher interest rates. Often these loans are used to pay off any higher interest rate credit lines. Even if there is no use for money, small personal loans can be beneficial. By putting the money to the side, monthly payments can be easy to make and improves credit scores. Just like with credit cards, it is important to shop around for the best terms and interest rates. Make sure that there are no penalties for early payoff.
Minimize the impact of monthly bills by making timely payments. Work with debtors to find the best payments arrangements. Eliminate non-essential bills and focus on keeping essential bills paid. Budgeting often means making hard choices. Non-essential spending needs to be eliminated or reduced. This free cash can be used to pay off outstanding debts or even for savings. Proper budgeting can allow for savings that will help creditworthiness for future loans and unexpected expenses.
These five steps can provide the basic steps to improving credit ratings. As credit is increased, keeping with these steps can help to ensure that financial problems have limited impact on credit. Having good credit can open up better credit terms and provide for higher borrowing limits, when they are needed. Five simple steps can provide for better credit and a better way of life.