You’re ready to take out a loan to buy a house, a car, or get a credit card. You fill out the application and wait to hear from your bank about their decision to lend you the money or not.
And then you get the dreaded phone call. Your credit score was not high enough to approve the loan! Is there anything you could have done to get a higher credit score?
Getting and maintaining a high credit score is like playing a game. But like any game, you must first understand the rules so that you can create a winning game plan. Here are the rules of the credit score game that you need to understand to get the best score possible.
Rule 1 – Pay your bills on time (includes 35% of your credit score equation). Payment history is the most important part of your credit score and is pretty straightforward – it’s a record of whether you paid your bills on time or not.
Action: don’t be late to pay your bills! A single late payment may not affect your score, but multiple late payments will lower your score. Better yet, understand which providers are reporting your payment history and which are not.
Rule 2 – Avoid maximizing your credit (30%). Just because you have a $ 10,000 credit limit doesn’t mean you have to use it all. Using near or all of your credit limit is a signal to lenders that you may be a high risk borrower. Insurance companies also like to use high spending limits as a reason to increase your home and auto insurance, so be warned!
Action: Use no more than 25% of your available revolving credit and pay your credit card balance in full each month.
Rule 3 – Build a long history of responsible credit use (15%). Lenders want to see a balance sheet that you can manage by being given a credit limit. If you have old credit accounts that are still open and in good standing, this indicates your reliability, which translates into a higher credit score.
Action: When opening a credit account, keep it active as long as possible. If you stop using an account, consider leaving that account open, but only if it will help your score and not hurt you in getting new credit.
Rule 4 – Use multiple types of credit (10 percent). Lenders like to see you with both revolving debt (credit cards) and installment debt (auto and home loans).
Action: If your credit limit is low, request a limit increase. Many banks will honor the request, especially if you have already made payments on time. If you are new to using installment loans, consider making a small purchase (like a household appliance or electronic device) using an installment loan.
Rule 5 – Avoid too many credit requests (10%). Applying for many loans or credit cards in a short period of time tells lenders that you may be trying to get more credit than you can afford.
Action: only apply for one type of loan at a time. Several inquiries for the same type of credit, for example a mortgage loan, in a short period of time will count as only one request.
You can improve your credit score by understanding these rules and putting them into practice.
James Angell is a Chartered Accountant based in Willits. His office is located at 461 S. Main St. and can be reached at 459-4205.