Improving your Credit Score
- how to become a top ranker!
Maximizing your credit score is clearly of great benefit.
It ensures you get the best rates on new credit cards, car loans, or mortgages that you take out. The difference between a score of say under 500 and over 700 can be significant - upto several hundred dollars a month in additional interest!
Here are some tips put together by our readers ('real' people who've been-there, done-that!) on how to become a top ranker on your credit scores.
- When you first move to America as a new immigrant or work visa migrant, do not be obsessed with your credit score. For the first several months, you are likely to have a low score or may even fail to generate a score, since your credit history would be so new. Age of credit lines is an important criteria in calculating FICO scores. So even if you pay your bills on time - all the time - and have excellent credit habits, the recentness of your credit data means you'll never have a high score for the first few years. Do not get worried - there's nothing you can do about that, except be patient. The passage of time and consistency of good credit habits will eventually take your score up.
- Take the first few baby steps to build your credit history. Obtain your first credit card. Get a new credit line e.g. a car loan. Focus only on building your history, not on your score.
- Do NOT apply for too many credit cards over a short period of time (e.g. 4 cards in 4 months). Space out your applications for credit cards or credit lines. Try applying for no more than 1 credit line every 3-6 months (I know that's hard to do initially, especially since you're setting up and need to make big purchases. But try).
- A point associated with what I just said above. Every time you give your social security number to a company offering you credit (say, on one of those unsolicited phone offers), and every time the company accesses your credit file, it has a minor but negative impact on your credit score - wther they eventually give you credit or not. NEVER divulge your social security number to anyone unless you are willfully making a serious credit application. This goes back to my Citibank credit card example. When they refused me a card the first time, and when I asked the to re-evaluate, I was only making matters worse by increasing the credit checks from an unfavorably predisposed lender.
(An important point here: credit checks by yourself, to check your own credit report, do not impact your score negatively. Similarly, if you're comparison shopping - say obtaining rates from a variety of car insurance companies - and each one needs your SSN to check your credit history and give you a quote, that's OK. A series of credit checks within a short span of time (few weeks) is not an issue. But remember the general rule and be cautious.)
- Get as high a credit limit as you can, when applying for a new credit card. It doesn't matter if you don't expect or intend to use the credit. Go for the highest possible limit all the same. FICO scores are impacted by the ratio of your outstanding balances at the time of enquiry to the total credit limit of your credit lines. So the higher the credit limit of each credit card, the better your ratio will be, no matter what your spending habits.
- For the same reason as above, do not keep an outstanding balance of more than 30% of your limit on any one credit card at any given point in time. If you must spend more than 30% of your limit (in the inital days of relocating, you might need to buy furniture or other big ticket items), make sure you pay down the balance quickly. Else spread the charge over multiple credit cards.
- Some credit card companies do not report credit limits to the credit bureaus. In such cases, the bureaus look at previous spendings on your card and take the maximum outstanding balance over the previous few months as a proxy for your credit limit on that card. This is an interesting fact - it implies that charging a high amount of money on your credit card for one month (and paying it off quickly) could be advantageous. For that could become proxy for a high credit limit, should the actual credit limit not be available with the credit bureau.
- Remember - the older your credit history, the better your score. So, do NOT close your oldest credit cards, even if you don't use them anymore. Just their age will help increase your credit score. Closing an old card might in fact hurt your score.
- An important corollary to the above. Use your oldest credit cards once a while, even if they're not your regular choice. Just charge a small amount on them once in a few months, and pay it off quickly. Inactivity for too long on a credit card results in the credit bureau ignoring or reducing the important of tht credit line in your FICO score. And you don't want your oldest cards to be ignored!
- Not all credit lines are of the same 'type'. Credit cards are referred to as a revolving credit line, since you can pay off some balance on the statement due date, and carry forward remaining amounts to the next month, after paying finance charges. A car loan, on the other hand, is referred to as an installment credit line. Here, you are required to repay a fixed amount every month and cannot carry forward. A mortgage is also an installment credit line. A consumer loan is yet another type of credit line - it is considered a form of retail finance. Having at least one of each different 'type' of credit line open on your credit report is good and helps increase scores. Why? Because it shows your ability to manage a variety of credit loans responsibly. Having too many of one credit type and none of the other reduces scores.
- In any case, don't have more than 10-12 open credit lines in your credit history. Too many credit cards or loans reduce credit scores, just as too few do.
Keep monitoring your credit report
for inaccuracies. In particular, take immediate action if you see outstandings on a bill you've already paid, or expenses you didn't incure. If credit limits for cards are lower than what they really are, ensure you get that corrected too.
- Pay your bills on time. The single biggest factor that brings down your credit score is a late payment. The point of having a credit card is to make partial payments every month, and finance the rest. That part's fine. But at least ensure you make the minimum monthly payments. Don't miss out on a due date. And if you did miss a payment, get current and stay current!
- Once your score goes over 720 or so, the incremental benefit of further improving the score reduces. You are already in the top bracket, and start receiving the best offers on new loans. So don't kill yourself trying to overly monitor your score and squeeze out more optimization.
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