Improve your Credit Score

What is a credit Score?
Your credit score is the way creditors measure your credit worthiness. Credit bureau scoring is a statistical means of assessing how likely a borrower is to pay back a loan. A credit bureau score is based on the data available in the borrower's income, assets, or bank account, although those and other factors are still considered by lenders investors, independent of the score.
Creditors report your account information to one or all three credit bureaus (Equifax, Experian and Trans-union). That information is put into the proprietary FICO scoring formula. Because FICA is proprietary they do not publish how they arrive at a credit score, but with many years of experience I have learned a great deal about what affects your scores and how to correct it.

Steps to improve your credit score

What you are about to learn , 95% of the population does not know or have not yet figured out. There are five things that will dramatically affect your credit score.

• About 35% of your score is affected by your payment history
• 30% by the amount of debt you have
• 15% your credit history
• 10% new credit
• 10% types of credit.
  
  

Payment history has the largest effect on improving your credit score at 35%

If you have any payments 30, 60 or 90 days late it can be devastating to your credit score. Any new late payments charge-offs, collections or bad debt of any kind will lower your score by as much as 107 points. If you have credit cards with over two years history of good credit and are not using them, do not close them. You may lose all of that good history. You should keep them open and active. To keep them active you need to charge something on them every five months. Even if you only charge $5.00 that will keep it active and you will keep the good history. If you close them your credit score will drop.

Amount of Debt at 30% can have a lot to do with improving your credit score

Check your current credit card limits to be sure that you do not go over 30%. Ideally you should pay off your credit cards to a zero balance each month and never charge greater than 30% of your limit. Here is am example: A client that came to me was really upset. They could not get a loan because there credit scores had dropped so low. He could not figure out how this could be. He said “I pay all my cards off every month and have never been late." When the I ask him how much he charged each month I found out that the client was charging close to his limit every month and then paying it off. Here is the problem. Creditors report information to the credit bureaus every 30-90 days and in most cases they do this in the middle of the month, when most people have the highest balances. Do you see the problem? Even though you pay off the card each month, the credit bureaus report it when you have the most balance and so you are over the 30% balance rule and receive a huge hit. The answer to this client’s problem was simple. The broker had him call his credit card companies and ask them to raise the limits on the three cards he was using. They raised the limits and he now was able to use the cards each month but never go over the 30% rule. Within several months his scores improved and he was able to get the loan he needed.

Length of credit history at 15%

The longer your accounts have been open and active the better your score. (Especially revolving) Remember to use the cards with good history once every five months. Any open credit cards with zero balance and that have not been used for more than 6 months, is considered an "inactive" account and will typically lower your score.

New open accounts at 10%

Did you know that when you open a new account it will lower your score for 6-12 months? In most cases, opening a new account of any type will lower your scores. Have you ever been in a store and about to buy something and the sales person says, "If you open a new account with us today we will take another 10% off the price"? Don't do it. Your score will most likely drop for the next 6-12 months. Only open accounts that you really need.

Types of credit at 10%

There is a hierarchy of "types of credit" that goes something like this:

• Mortgages
• Auto loans
• Bank credit cards
• Store credit cards
• Other installment loans

A mortgage loan carries more positive points after being open for 6 months than any other account, so if you can't pay anything else pay your mortgage first.

Last thought on improving your credit score
I want to leave you with one last thought. Do you remember when the credit card companies started offering a start rate of 0% interest on there cards for the fist 6 months? A lot of people went out and opened those accounts took the balances on there existing high interest cards and put them on the new one. After 6 months they did it again. They thought they were really pulling one over on the credit card companies and had a great time until they saw how low their credit scores dropped. The credit bureaus reported them as new accounts and reported them with a high balance and zero payments. I saw their credit scores go from 720 to as low as 580 in some cases. Don't do it.
Good luck and happy credit scores.

The Finance Guy

Come visit me at www.andersoncapitalfund.com