by Pastor Kregg Hood
March 12, 2015
Credit scoring is one of the deep, dark secrets of our modern financial world. Banks and other lenders want to lend money, and we want to borrow from them. But these lenders also worry that people won’t pay their bills. So, to protect their interests, lenders now turn to sophisticated formulas and complex computer technology to create credit scores. This helps them make new lending decisions in seconds.
The most commonly used credit score is a three-digit number from 350 to 850. Your score rates your risk to a lender or insurance company. Higher numbers indicate less risk and potentially lower prices. Lower scores predict higher risks, creating higher prices for your home, car, insurance and other consumer items.
So, to increase your credit score:
1. Check your credit report.
The main credit reporting agencies that keep up with this information are Equifax, TransUnion and Experian. Each one has a website by their name and also a toll-free contact number. Errors with negative information can reduce your score and severely hurt buying power.
2. Pay all bills on time.
35% of your score comes from your payment history. Paying all your bills on time is the most important step you can take to create (and keep) a high score. Remember, lenders may report you as late, even if your tardy payment was only an accident.
3. Reduce credit card debt.
30% of your credit score is tied to the size of your total debt as a percentage of your total credit limit. This means that, if you owe too much money for their secret formulas, your score will drop, even if you pay on time. Your best defense is to pay off debt as quickly as you can and keep your outstanding credit or charge card debt less than 50% of the total credit available. Below 30% is even better.
4. Pay more than “the minimum.”
Lenders use this tactic to lead you to stretch out your payments. This allows them to charge interest on your credit cards for a long, long time, even more than 25 years! However, if you pay more than what’s required, you’ll save a fortune in interest and raise your score more quickly because the consumer debt listed against your record will go down.
5. Take care of established credit accounts.
A long, positive credit history with a few lenders also raises your score. Also, once you’ve opened a credit account, don’t be too quick to close it. Contrary to public opinion, closing unused accounts can hurt your score.
6. Don’t apply for new credit unless you really need it.
Credit scores also drop when you request new credit. This means getting “90 days same as cash” or a 15% discount on your purchase will put a hit on your score.
7. Be patient.
It takes time for the system to raise your score. But every positive step matters, and in nine to 18 months, you can increase your score dramatically.