Credit Score Improvement

Improving one's credit score can be quite a challenge since there is no quick fix. People have to become responsible when it comes to spending and try and pay their bills on time. Improving credit scores involves improving one's payment history, reducing the level of indebtedness and limiting filing applications for new credit, since, these factors are assigned percentages, of around 35, 30 and 5 respectively, in the computation of credit scores. The remaining 30 is assigned to the length of the credit history and the availability of different types of credit, in equal proportions. The aforementioned factors together influence the credit score. For those, who are not familiar with the process of computing credit scores, the 3 credit bureaus collect and compile information that is deemed relevant, for the computation of credit scores. Experian, TransUnion and Equifax compute FICO and FICO advanced risk score, Empirica and Precision, and Beacon and Pinnacle respectively. FICO advanced risk score, Precision and Pinnacle are the next generation user friendly credit scores. Since 13th February 2009, Experian is no longer providing FICO scores to consumers although lenders will continue using FICO scores computed by Experian. The following credit scores improvement tips may help people improve their credit scores.

Tips for Credit Score Improvement

Improving Payment History: Paying bills on time can have a huge positive impact on improving a person's credit history and thereby credit scores, since, credit history is given the maximum weightage when it comes to computing credit scores. Delinquencies and missed payments will have a negative impact on credit scores. If the creditors resort to collecting the payment by employing the services of debt collection agencies, the record of the payment that is collected, will still stay on the credit report for 7 years. Defaulted loans, that are rehabilitated, will no longer show up on the credit report, however, a vehicle repossession will show up on the credit report for 7 years. Bankruptcies and foreclosures stays on the credit record for 10 and 7 years respectively, assuming that the petitioner filed Chapter 7 Bankruptcy. A Chapter 13 bankruptcy, generally, stays on record for 7 years. Foreclosures, bankruptcies, vehicle repossession and having to deal with collection agencies are a result of not paying bills on time or not paying them at all.

Reducing the Use of Revolving Credit: Credit cards and Home Equity Lines of Credit (HELOC) have a revolving structure, that results in people paying off interest on the amount of money that is used, while continuing using credit despite paying only the minimum balance. People, who have a problem with their credit scores, should try paying off revolving credit by using debt consolidation loans only if these loans do not have a revolving structure. Although, one should minimize the use of revolving credit, one should not cancel credit cards, moreover, if a person is not a spendthrift, it may even be advisable to approach the credit card companies and request an increase in the credit limit. Increasing the credit limit lowers the credit utilization ratio, while canceling credit cards increases it. This is because of the way in which the credit utilization ratio is defined.

Credit Utilization Ratio = Total Outstanding Balance / Amount of Available Credit

A low credit utilization ratio is highly desirable. Hence, the discussion.

Availing New Credit: While applying for new credit, one must ensure that one limits the number of credit inquiries that are a result of loan shopping. This is because inquiries tend to bring down the credit score. Inquiries that are conducted within a span of 45 days are clubbed together and treated as a single inquiry. Using debit cards should also be avoided since businesses tend to conduct inquiries before allowing a person to pay by debit card. One can check one's credit report as often as required. The report can be obtained directly from the credit bureaus or agencies authorized to hand out credit reports.

Length of the Credit History: Length of the credit history is a measure of the risk involved in lending to a person. If the length of the credit history is short, creditors do not have a reliable measure of risk. Hence, one should avail loans gradually rather than all at once,since doing so may have a negative impact on the credit scores of a person with a short credit history.

It's evident that having a credit history is very important. People, who do not have a credit history may refer to the article "Credit Cards for People with No Credit History" since the key to good credit scores lies in having credit cards and using them responsibly to ensure that one builds up a good credit history.