Improving Your Credit Score

Your credit score, let alone Improving your credit score, isn't something that most people even think about very often. But since a healthy credit report is essentially your passport to financial opportunities, building and protecting this highly coveted score card is essential. Why? Because a higher score will usually get you lower interest rates, better car insurance rates and a chance to avoid having to pay deposits to utility companies.

Whether you're applying for a car loan, a bank or retail credit card or if you're seeking a pre-approved mortgage, your score, sometimes referred to as a credit rating, is used by the lender to determine if you're a good candidate for credit. A low credit score can flag you as a credit risk and may make it difficult to get that loan or charge account. If you're offered a loan in spite of a bad credit score, to compensate for the higher risk for the lender, you'll most likely have to pay additional fees along with a higher interest rate.

Credit Score Range

Credit scores can range from 300 to 850 points depending on the scoring system. And as you might expect, the higher the number, the better your credit score.

Each lender will determine its own policy with respect to what constitutes a good or bad credit score, thus variations exist. However, to give you some guidance in your 'improving your credit score' project, here's a brief breakdown:

  1. Excellent: 700 to 850
  2. Good: 680 to 699
  3. Fair: 620 to 679 (Average)
  4. Low: 580 to 619
  5. Poor: 500 to 579
  6. Very Poor: 300 to 499

Although there is some distinction between a low and a poor credit score, it's important to note that many lenders consider consumers with scores under the average as credit risks.

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Bad credit isn't necessarily forever.

Loss of employment, a challenging economy, living beyond your financial means, or generally mismanaging your money can result in a poor credit score. However, with more prudent lifestyle choices,  improving your credit score is possible. After all, banks love to lend money; it's the reason for their existence.

If you've experienced some financial setbacks, such as a bankruptcy (which remains on your report for 10 years) or an extended period of unemployment, don't lose hope. Most negative notations on your credit report are supposed to disappear from your credit history after 7 years. A smart, conscious belt-tightening, combined with a steely determination, can and probably will help you (and your spouse) with improving your credit score. Thus, live right and watch your credit score gently rise like a hot-air balloon on a warm summer's day.

To-do's for improving your credit score

Here are a few indicators used by credit rating agencies to determine your score. Improving your credit score - and just as importantly, keeping it high - involves altering your behaviour accordingly: 

  1. Fix credit report errors. Errors can lower your score, and fixing them can quickly improve it. Errors could include wrong account numbers, accounts that aren’t yours, inaccurate credit limits or loan balances, a payment mistakenly reported late, negative information that’s more than 7 years old, or an ex-spouse incorrectly listed on a loan or credit card. With proper back-up documentation, they can be disputed and removed from the records of the 3 main credit reporting bureaus -  Equifax and TransUnion in Canada and Experian in the USA. Each can provide you with a report upon request. So, if you're determined about improving your credit score, it's definitely worth making this your first step.
  2. Pay bills on time. The single biggest factor in your credit score is having a timely bill payment history. Never let a bill become overdue. This is big! So you won't forget to pay a bill, take advantage of a credit-provider's or utility company's automatic payment program. Many utility bills can be easily charged to your credit card before the due date. And of course, ensure that your credit card is paid off completely every month. Otherwise, you're defeating the purpose.
  3. Know your limits. Your credit score is based partly on your outstanding balances relative to your available credit. Be aware of your credit limits and avoid using over a third of the available amount. In other words, don't max-out your credit cards! If your credit limit, for example, is $10,000, make sure your outstanding balance doesn't rise above $3-4,000.
  4. Don't be a shopaholic. Avoid using retail-therapy to make yourself feel better. The high is short-lived, especially after you get the bill for your shopping spree. If you really like that new pair of shoes, and you really need them, buy them on credit when you have the cash in the bank to pay off the card when the bill arrives in your email box.
  5.  Avoid collections. Don’t ever let any bill, no matter the amount, or even if it's disputed, go to the collection department. These black marks on your credit are tough to eliminate. If this has been your experience, be prepared to provide a reasonable explanation, and pay it off! Also, insist  the lender immediately report the payment to the credit agency.
  6. Avoid retail store cards. When you’re asked  to apply for a store credit card to save money on your purchase today, say no thanks. The high rate that accompanies that shiny new charge card isn’t worth the savings on that purchase. And don't fool yourself - they expect to earn a tidy profit from their usurious interest rate when the debt is carried forward month after month.
  7. Build your credit history. You might believe that never borrowing money is a good thing. And frankly, you'd be correct to think so, except for one thing. One day, you'll want to buy something, like a car or a boat or a house, and you won't have enough cash in the credit union to do so. Hence, you'll need a loan. It will be times like these when you suddenly realize how important it is to have a credit history. You'll wish you had a record of owing money and paying it back promptly. To build a credit history, you need credit card. And pay it off in full every month to avoid interest charges.
  8. Don’t cancel your card. Even if you’re not using your credit card very often, don't cancel it. Canceling a credit card may actually lower your credit score. Instead, keep the card hidden in your sock drawer, and use it sparingly, even if you have sufficient cash to make that purchase. The exception would be to switch an unused card that carries an annual membership fee for one with no annual fee. Better to keep the money in your own jeans.

You should aspire to be a highly responsible credit card user. Besides the obvious benefits of being debt-free, you'll also be happier and less stressed out about money because you'll have more control - and enjoy the wonderful feeling about successfully improving your credit score. Then, when you're ready to buy your first home, you'll be well equipped to get the best terms from the lender.

Visit this website for more information on how a credit score can affect your major purchases. And this site for more on money-management.

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