If you’re keen on improving your credit in 2014 one of the best ways to do it is to look at your finances from a lender’s point of view. Lenders use an awful lot of data when they are deciding whether or not to take a risk on you as a new customer, including your credit history and credit scores. If you can put yourself “in their head” you’ll go far in understanding exactly what you need to do to make yourself look appealing as a customer. With that in mind our blog today has a number of tips and some great advice to do just that. Enjoy.
Make sure that you have a “good mix” of different credit accounts.
There are basically two different types of credit; non-revolving and revolving. Most people have too much of one and two few of the other, something that most lenders look on unfavorably. The difference between the two is that revolving accounts give you a set credit line, like a credit card, whereas non-revolving accounts like car loans and mortgages give you a specific amount of money that then needs to be paid off over a specific period of time. If you have a big imbalance between the 2, lenders may be wary of giving you more credit. Luckily this part of your credit history counts only for about 10% of your credit score.
The longer you’ve had credit the better your chance of success of getting new credit.
Generally speaking, the older a person is the more successful they will be at getting new credit because they have had more time to actually build their credit. On the other hand, a person who is 25 might still have a better credit score than someone who’s 40 if they got started early and made sure to use their credit wisely. In other words, a 25-year-old who has used credit for five years, has never had a late fee and never gone through bankruptcy will, in most cases, be able to get new credit much more easily than a 40-year-old who has had numerous late payments and gone through bankruptcy.
Shopping for credit to often can hurt your credit score.
Every single time that you apply for credit, whether it’s a car loan, credit card or what have you, something called a “hard inquiry” is seen on your credit report as lenders look at your credit history to determine the type of risk that you present. These stay on your report for up to 2 years (but only affect your credit for 1 year) but having too many of them into short a time period can be a red flag to lenders.
Never pay any type of credit account late.
This should go without saying but it’s surprising how many people don’t realize the negative impact that a late payment has on their overall credit score. The simple fact is that in today’s world punctuality and paying bills on time is seen by lenders as incredibly valuable. Bills, no matter what they are, have due dates and missing those dates doesn’t make you look bad, it makes you look really bad. Keep in mind that your payment history, which includes late payments, accounts for a whopping 35% of your overall credit score. This is the highest amount and makes paying bills one of the most important things that you can possibly do in order to keep your credit score looking good.
Having too much debt is never a good idea.
Paying your bills on time is always a good idea but, even if you do, if you overutilize your credit you could be damaging your ability to get future credit. For example, if you have $5000 worth of credit available on one or two different credit cards and you use $2500 to put a down payment on a new car, 50% of your available credit is now unavailable. That’s a huge amount, especially when you consider that lenders like to see that at around 10%. The lesson; keep your credit balances as low as possible if you’re going to be looking for new credit anytime in the near future.
Simply put, the person who pays close attention to their finances the way a lender does, uses the least amount of credit as possible, pays their bills on time every time and only looks for new credit when it’s absolutely necessary, is the person who’s going to have the better credit score and credit history. That person will also be able to get new credit much more easily.
If you have any questions about credit or personal finance in general, please drop us a note and we’ll get back to you ASAP with advice, answers and solutions.