The first important step is to gain a basic understanding of how your credit scores are determined. I am sure this will be new information for you, since this is not taught to any of us in school. In fact, when it comes to the three credit bureaus, equifax, experian, and transunion, they prefer to keep everyone in the dark on how credit scoring works.
To explain what makes up your credit score in as simple terms possible, this is how it works
Payment History 35%: This is the largest contributing factor for your credit scores and represents your history of making payments with your creditors.
Credit Utilization 30%: This is the percentage of available credit used. We want to keep our balances below 50% of the limit ideally. This is where we will find the most room for improvement in most cases.
Credit History 15%: A more seasoned account carry more weight than one that was just opened.
Credit Inquiries 15%: Whenever you apply for credit, an inquiry is registered on your credit reports. If you get too many, it can have a negative effect.
Type of Credit In Use 10%: Type of accounts, and number in use. Mortgage loans are the best, and finance company accounts are the worst.
Since we now have an understanding of how scores are calculated, now we can focus on a couple of things we can do right now to maximize our scores.
Get an increased credit limit. This is very simple to do, and I think you will be pleasantly suprised by the success rate if you just make a couple easy phone calls. Just pick up the phone and ask to raise your credit limit. Now you can also use my favorite strategy and say something like, "I am considering a balance transfer to another card with a higher limit and better interest rate, but thought I would see first if you would increase my limit and possibly lower my interest before I cancel this card.". I have found this to be successfull nearly all the time, both personally as well as with my clients.
Let's say for example you have a credit card with a $5,000 credit limit, and you currently have a $4,000 balance on it (80% utilized). After your quick phone call, they agree to raise your credit limit to $6,500 (now 62% utilized). This alone will immediately increase your credit scores. Remember in the "Credit Utilization" section above, we want to ideally keep our balances below 50% of the credit limit. This brings us to the next powerful tip.
Lower Your Balances! Continuing from the example above, you are now 62% utilized on your credit card. This means you still have some room to further maximize your scores. If you pay $750 on this credit card, you will bring the balance down to 50% of the new credit limit ($3,250 balance on $6,500 credit limit). Now, you might be saying that you don't have $750 to pay down your credit card. That's ok, you could stop here, you have already increased your scores, and you can get the limit raised for all your credit card accounts. However, if you are trying to buy a home, or even a car, you can potentially save thousands in interest on your new loan and get a lower monthly payment, just by paying a little down on your current accounts. When that results in higher credit scores, you may qualify for much better loan terms.
These are very powerful techniques. I have seen this work for clients time and time again. One client recently was able to raise the credit limits on 3 credit card accounts and raise their scores by 105 points immediately.
Bear in mind that these techniques are recommended to those with a clean credit history. Credit card companies are more willing to work with those that have an established history of making payments on time. If you have negative items on your credit, perhaps a more aggressive credit repair approach is more appropriate.
To explain what makes up your credit score in as simple terms possible, this is how it works
Payment History 35%: This is the largest contributing factor for your credit scores and represents your history of making payments with your creditors.
Credit Utilization 30%: This is the percentage of available credit used. We want to keep our balances below 50% of the limit ideally. This is where we will find the most room for improvement in most cases.
Credit History 15%: A more seasoned account carry more weight than one that was just opened.
Credit Inquiries 15%: Whenever you apply for credit, an inquiry is registered on your credit reports. If you get too many, it can have a negative effect.
Type of Credit In Use 10%: Type of accounts, and number in use. Mortgage loans are the best, and finance company accounts are the worst.
Since we now have an understanding of how scores are calculated, now we can focus on a couple of things we can do right now to maximize our scores.
Get an increased credit limit. This is very simple to do, and I think you will be pleasantly suprised by the success rate if you just make a couple easy phone calls. Just pick up the phone and ask to raise your credit limit. Now you can also use my favorite strategy and say something like, "I am considering a balance transfer to another card with a higher limit and better interest rate, but thought I would see first if you would increase my limit and possibly lower my interest before I cancel this card.". I have found this to be successfull nearly all the time, both personally as well as with my clients.
Let's say for example you have a credit card with a $5,000 credit limit, and you currently have a $4,000 balance on it (80% utilized). After your quick phone call, they agree to raise your credit limit to $6,500 (now 62% utilized). This alone will immediately increase your credit scores. Remember in the "Credit Utilization" section above, we want to ideally keep our balances below 50% of the credit limit. This brings us to the next powerful tip.
Lower Your Balances! Continuing from the example above, you are now 62% utilized on your credit card. This means you still have some room to further maximize your scores. If you pay $750 on this credit card, you will bring the balance down to 50% of the new credit limit ($3,250 balance on $6,500 credit limit). Now, you might be saying that you don't have $750 to pay down your credit card. That's ok, you could stop here, you have already increased your scores, and you can get the limit raised for all your credit card accounts. However, if you are trying to buy a home, or even a car, you can potentially save thousands in interest on your new loan and get a lower monthly payment, just by paying a little down on your current accounts. When that results in higher credit scores, you may qualify for much better loan terms.
These are very powerful techniques. I have seen this work for clients time and time again. One client recently was able to raise the credit limits on 3 credit card accounts and raise their scores by 105 points immediately.
Bear in mind that these techniques are recommended to those with a clean credit history. Credit card companies are more willing to work with those that have an established history of making payments on time. If you have negative items on your credit, perhaps a more aggressive credit repair approach is more appropriate.
About the Author:
This article was written by Daniel R. Michaelson, an author and leading authority on consumer debt consolidation and credit repair. You can learn more about approved credit repair.
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