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Credit Card 101

Improve Your Credit Score

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How To Improve Your Credit Score

 

Improve Your Credit Score - Pay Your Bills On Time

This is the Holy Grail of building a good credit score. Let's say it simply slips your mind to pay a bill one month. Take a moment to put yourself in the position of your lender or creditor - This could be your bank, credit card provider, phone company or gas supplier. From the lender or creditors perspective you've already received your goods, services or credit and all of a sudden you're not paying anymore. They don't know if it slipped your mind, whether you've gone into hiding or whether they'll ever get any more payments out of you. In the vast majority of cases where a creditor fails to receive their payment - they don't know why. This makes creditors and lenders nervous and they don't like it.

This is the essence of why credit scores exist. If you're unreliable when it comes to paying your dues, mainstream lenders or creditors wont want to work with you. This means that you're left with the choice of 'no credit' or having to pay through the nose for credit because you're considered a high risk when it comes to making your repayments.

The solution is very simple. Pay your bills on time.

If you're forgetful or lousy with paperwork, simply set up direct debits or standing orders to cover your bills on their due dates. Pretty much every company that uses credit scores to assess your worth will offer direct debit facilities.

If you have credit cards be sure to set up a system with your lender / bank so that the minimum payment will be made automatically. If you intend to pay off more than the minimum payment you can make an additional payment at any time. This not only saves you from getting black-listed each time you 'forget' to pay but also saves you the expense of the late payment fine levied by almost every credit card company.

 

Improve Your Credit Score - Borrow And Repay... Borrow And Repay...

There are two types of people with poor credit scores - There's the bad payers and there's the unproven. We've already discussed why bad payers deserve poor credit scores, but what about the other group?

The 'unproven' are people who have lived below the credit radar. They pay cash for most things, rarely take out loans and don't use credit cards. This is a fine way to live if you want to stay out of debt, however sometimes there's a necessity to borrow money, for example when buying a house. When an unproven approaches a bank for a mortgage, the lender does a credit check. As a result of the unproven having no loans or credit in the past, there's no record of them honoring repayments. This makes the lender dubious about loaning £180,000 to someone with no credit history.

The way to improve your credit score is to visibly borrow and repay. By visibly we mean under the watchful eye of the credit score agencies. There's no point borrowing £10 from your friend and then paying him back the following week - it has to be visible to the relevant agency. Some examples are;

You don't need to be borrowing huge amounts of money. You can keep the amounts small, but your repayments must be consistent and on time. It is the consistency of you borrowing and repaying WITHOUT PROBLEMS that will boost your credit score.

 

Improve Your Credit Score - Apply For More Credit

The ironic thing about credit is that the more you have available - the more lenders tend to offer you. However, there's a subtle art to reaching this point.

If you apply for five credit cards in one month, alarm bells will sound with the credit agencies. They don't like all out credit assaults. What you need to do is spread your applications over time. If you follow the guidelines on this website it's unlikely you'll need more than one or two new credit cards each year anyway.

However, just because you don't NEED another credit card, it shouldn't dissuade you from applying for one. It's probably not going to cost you anything and depending upon what deal the new lender is offering - it may even save you some money. So, its good to apply for one or two new credit cards each year. Ideally keep the applications apart by six months or so if you can.

The reason for this will become clear as you work through this page.

 

Improve Your Credit Score - Old Accounts Are Gold Accounts

Credit agencies assign credit score points based upon the average age of your accounts. When you open new accounts or obtain new credit cards it shifts the average age of your accounts downwards (away from where you want). However, the benefits of opening new accounts (periodically as discussed) outweighs the small average age penalty. The way to minimise the average age penalty when opening new accounts, is to keep your old ones open too. There isn't really any positive reason to close an old account even if it's been marked for bad credit in the past. The bad credit mark will remain even if the old account is closed, but worse still your average account age will also slip.

Many lenders will now contact you if you have a bank account, store card or credit card you haven't used for some time. They will generally say that if you don't use the account in the next 28 days or contact them with respect to the account, they'll automatically close it. Never allow lenders to close your accounts! If it means using the account once to pay for your weeks shopping or something trivial - do it. Once you've used the account the lender will keep it open anything from one to three years before contacting you again. When they do, simply repeat the process.

 

Improve Your Credit Score - Think Like A Lender

The information we discuss on this website is about saving you money. For every pound or dollar you save, a lender is potentially out of pocket. Remember that lenders are money savvy and they intend to profit from you. However when a lender sees that they're not making money from you, even though you may be an excellent risk, they may decide not to bother offering you further business (cards).

If you pay your credit card in full every month the lender isn't making a bean out of charging you interest. If you transfer your credit card balance every year to yet another 0% deal the same applies.

This is where you need to decide whether you're happy with your current credit score or whether you need to invest in improving it. If you're happy, simply follow the money saving tips already presented. If your credit score does need improving here are some reasonably inexpensive tips to help.

So always use your lowest rate APR card for this credit score fettling. It's no good using a card with an introductory discount for this method - it has to be a (low) 'standard' APR rate. Retain a small balance, meaning something in the region of £30-£40. Pay the 'minimum payment' ON TIME as indicated by the credit card company. If the balance becomes very low simply make an inexpensive purchase to increase it slightly.

The reason for this exercise is to show the credit company they can make money out of you. Any credit card company will love a customer that makes minimum payments, because that means secure long term profits for them. Remember that you will be a little out of pocket by doing this. You'll be paying interest on the balance month after month so it's important to ensure the balance remains very low. However, if you want to appear like a promising prospect for future deals...

 

Improve Your Credit Score - Debt To Limit Ratios

A debt to limit ratio is basically a figure representing how much of your available credit you're currently using. Another way to look at it would be to compare how much debt you are in, compared to how much debt you could be in. So if you have £10,000 of credit available on your cards in total and you have £6,000 of debt - your debt to limit ratio is 60%.

The ideal debt to limit ratio is below 30%. Anything over that and you're going to be progressively penalised on your credit rating. The higher the debt to limit ratio - the more severe the penalty will be.

We talked earlier about getting as much credit as possible whilst applying for that credit periodically. The reason for applying for more credit is to drive the debt to limit ratio down and hopefully below the 30% mark.

Let's consider the example above where there's £10,000 of available credit and £6,000 of debt giving a debt to limit ratio of 60%. Now lets imagine you get a new credit card with a £4,000 limit. If we add the original £10,000 limit and the new £4,000 limit together we get a new credit limit of £14,000. However the debt is still £6,000 so the debt to limit ratio shifts to about 43%. (6000/14000 x 100 = 42.85%)

Now lets assume six months has passed and you apply for a new credit card. It has a credit limit of £3,000. Your overall credit limit has now risen to £17,000 and your debt remains £6,000. Your new debt to ratio limit is now 35%, incurring far less penalties than before. Repeat the process once more and your debt to limit ratio would probably drop below 30% even though your debt remains constant at £6,000.

Open new credit card accounts periodically to keep your debt to limit ratio low.

You can find the best UK Credit Card deals HERE.

You can find the best US Credit Card deals HERE.

 

Improve Your Credit Score - Check Your Credit History

Credit agencies are notorious for holding inaccurate data. You are entitled to view (and question) your credit history for a small admin fee. It is almost certainly worth the time and money to check the details held in your history are accurate.

You could well find entries in your history that relate to people at your address you've never even heard of, of catalogues you've never subscribed to and of services you've never received. You need to raise these with the credit agency and get them removed. Normally it's obvious there's been a mistake and the agency will clean things up for you, although don't think for a moment that they'll delete genuine credit issues you've bought upon yourself.

A good place to start is Equifax.

Equifax UK

Equifax USA

 

Improve Your Credit Score - Leave A Trail

If you live in the UK and are not on the Electoral Role then you could well be penalised on your credit score. When someone is considering giving you credit they'll almost certainly want to know where to find you. People on the Electoral Role are generally easier to find than those who are not. If you live in the USA be sure to sign up to any State Registers that are used for voting or census. This makes you more visible to credit agencies.

Another way to be penalised is to move around a lot. If you change your address several times a year it's difficult to keep tabs on you and hence chase you if you default on repayments. There's also the added problem that statistically you're likely to pass through postcodes or zips which are already marked for bad credit. With the current state of credit records it's quite likely that you'll pick up penalties at certain addresses whether you deserve them or not.

The final problem with moving around a lot is being less than honest about how long you've lived at certain addresses. This can produce gaps or overlaps in your credit history both of which look bad in terms of your credit score.

Here's a list of DO's to improve your credit score;