back to articles | December 31, 2018 | Dale Peterson

Categories: Consumer Credit

Tips to Improve Your Credit


Improving Your Credit Scores

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Improving your credit is not only worthwhile, it's a smart thing to do. A common misconception is that getting more credit means that you are more credit worthy. Nope, that's not what happens. For example, during the holiday season, many retailers and credit card companies often offer you the chance to save 10% or more on purchases by opening credit-card accounts they offer. Even throughout the year, retailers offer savings on your purchase if you sign up for a credit card. If you are also looking to buy a house or a car during that time, you might want to think twice about signing up.

The reason: By opening several credit lines in quick succession can actually lower your credit score, the all important numbers used by everyone from car dealerships to mortgage lenders to decide how likely you are to repay your debts.

Lower scores mean you may be charged higher interest rates on auto loans and other types of borrowing. They can also affect you in less obvious ways. Many auto insurers, for example, use credit scores to set premium prices, and a growing number of employers factor them into their hiring decisions.

Credit Improvement Basics

There are many articles that go into great depth about credit scores but let's take a quick look at the critical areas for basic understanding. Each person who utilizes credit has three standard credit scores, as a person's creditworthiness is tallied separately by the three major credit reporting agencies. The scores – known as FICO scores, for Fair Isaac Corporation, the company that pioneered credit scoring about 50 years ago – range from 350 to 850. The most current national average suggests that the national median score is about 673.

While the math behind FICO scores is extremely complex, there are several key principles that you can follow to raise them. Here are the key factors:
1. 35 % - How well bills are paid on time
2. 30 % - Your debt to available credit ratio
3. 15 % - How long you have managed credit
4. 10 % - How often have you applied for credit over the last 60 days
5. 10 % - How many different types of credit have you managed

Let's take a look at these a little closer.

1. Pay your bills in full and on time
The most important way to improve your credit score is also the least complicated. In fact, your history of making payment on your current bills accounts for about 35% of the FICO score. Points are added for people who always pay their bills on time; points are subtracted for those with some late payments and non-payments and bankruptcies. The more credit that you have used, and paid consistently, the better your score.

a. Missing credit card payments or submitting the minimum due each month will immediately lower scores, as will any debt collections or bankruptcy filings that show up on your credit report. The only good news here is that credit scores reflect fairly recent activity, so major negatives like collections will eventually age their way off credit reports after several years.

2. Maxing out your credit cards will tank your credit scores
Even using 50% or more of a limit can cause problems. For anyone looking to boost their score the key is to maintain a low "credit utilization" level. This refers to the percentage of available credit that you have on each of your credit cards. The credit utilization level falls under a complex category known as "amounts owed." The lower that ratio - the higher your score. This makes up 30% of the FICO score.

a. If you have five credit cards with a $2,000 credit line each, for example, it's not wise to carry a balance of more than $1,000 per cards. It's better to carry smaller balances on several cards than to pile everything onto one card.

b. Let's take another example. If you have a $100,000 home-equity line and four credit cards, each with $5,000 limits, your total available credit is $120,000. If you've borrowed a total of $5,000 on the credit cards and $10,000 on the home-equity line, your debt amounts to $15,000, or 13% of your available credit.

3. Build up a lengthy credit history
This means it's usually better not to close out all of those old credit cards – unless new ones are replacing them – because keeping them open builds your credit history. How long you have been managing your credit is certainly important. This makes up about 15% of the FICO score.

a. Keeping a few dormant accounts active will help lower the balance to limit ratio, since limits are factored into the credit utilization formula.

4. Don't open new accounts within 60 days of making a major purchase
This is an area on the credit report that is worth about 10% of your score. Taking out new credit lines raises red flags because it makes you look riskier. Each time you apply for credit, a credit query hits your file. If you have a lot of those inquiries in a 30 day period, this portion of your score suffers. This is why it's best to avoid all those retail cards during the holidays – unless of course, a temporary decline in your credit score is no big deal. One thing to note - Mortgage and auto loan inquiries, within a 14 day period, are only deducted once. Why? Smart people shop for APR's and terms and the credit bureaus recognize this. Just be smart and think twice about your future purchases and what looks likely to take place over the next few months.

5. Have a wide variety of credit experiences and loans, over time
This is called diversification and means that you have had and get credit for having a variety of loans. Someone who successfully paid a mortgage, a home-equity loan, a car loan and credit cards will score higher than someone who has one type of loan. Therefore, it's better to have an assortment of loans, including installment plans like auto loans or mortgages rather than simply credit cards.

6. Make sure your credit report is accurate
This is another very important consideration. Since credit scores are based on credit reports, it's very important to make sure the information in your reports are fee of errors and fraud. Federal law gives you the right to get a free report from each of the major credit bureaus once per year. If you would like to get more info on this topic, go to This site allows you to request a credit file disclosure, commonly called a credit report, once every 12 months from each of the nationwide consumer credit reporting companies: Equifax, Experian, and TransUnion. FreeScore360.

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There you have it. We've provided you with just a few guidelines on how to improve your credit scores. Take your time, be smart but take action. It means saving a lot of money over time if you do. Good luck and protect your credit. We hope it helps you find the auto loan or auto refinance loan that you want. Your Loan – Your Way.

Don't forget to check out our new Auto Buying Program to purchase your next car.