Here are some suggestions that might help you improve your credit history.
Working on Your Credit History
If you have been managing credit for a short time, don’t open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a large effect on your score if you don’t have a history of other credit information. And, rapid account build-up can look risky if you are a new credit user.
Remember this point when you are out shopping and the department store clerk offers a $5.00 discount for applying for a new store credit card. The discount seems tempting, and you may want the new card, but don’t do this too often. Try to keep your new credit inquiries to three to four times per year.
As long as your credit is in repair mode, you should avoid making any more applications for credit. It’s likely that you’ll get turned down for credit and the applications will only decrease your credit score. Don’t open accounts just to have a better credit mix – that approach likely won’t raise your credit score.
Establish long-term accounts. Roughly 10% of your credit score relates to the length of time you have had your accounts. It is common for people to hop from credit card company to credit card company, constantly seeking to take advantage of a low introductory interest rate. Again, this makes sense from a financial point of view, but it can lead to a lower credit score. You will be awarded a higher credit score if your accounts have been open and active for a longer period of time. Multiple new accounts lower your score, whereas a stable number of credit accounts that have been used for years will significantly raise your credit score.
Have an emergency fund. A sizeable emergency fund will not directly raise or lower your credit score, but without one your score could suffer in the event of a financial emergency such as an accident or extended illness. If you have an emergency fund to draw on in time of need, you eliminate the temptation or necessity of having to tap the available credit lines on your credit cards. An emergency fund is a safety net for your credit score.
Borrow great credit from a relative. You may be wondering how it is possible to borrow credit from another person. This is easy to do and is especially useful to young adults who have yet to establish credit (although anyone can benefit from this technique). If you have a relative or close friend with excellent credit history, have them add you to one of their credit card accounts. Ideally, it should be an account that has been used for years, has a high credit limit, has low or no balance, and has a perfect payment history with not one late payment. When you are added on this account, the payment history of this account is recorded on your credit report because you share the account. You now have a great credit reference on your account. This is perfectly legal and can be used to raise your credit score immediately.
Helping Build a Great Credit Record
Have credit cards – but manage them responsibly. In general, having credit cards and installment loans (and paying timely payments) will raise your credit score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.
Have a balanced mix of different credit types. While this is not going to produce huge increases in your credit score, it will help improve it. If you have ten credit accounts on your credit report, it is better to have several different types of credit such as a home mortgage, an auto loan, a few department store cards, and a VISA or MasterCard. You would score higher with this balanced mix of credit types than if all ten accounts were credit accounts at various department stores. Having several consumer finance company credit accounts will affect your credit score negatively.
Be aware that paying off a collection account will not remove it from your credit report. It will stay on your report for seven years.
Know your credit report. It is okay to request and check your own credit report. This won’t affect your score as long as you order your credit report directly from the credit-reporting agency or through an organization authorized to provide credit reports to consumers.
Do your rate shopping for a given loan within a focused period of time. FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.
Be patient. Your credit history wasn’t created overnight, so don’t expect it to improve by tomorrow. If you have a history of making late payments on multiple accounts, one payment on time is not going to overcome all the previous negative impacts. But, be patient. Your score will rise over time.
Well, now, what do you think? Can you come up with an instance in which you can put these suggestions into practice and get a great rate on your next loan?
As always, feel free to comment or email me with questions and suggestions.