Your Credit Score
The contents of your credit report can make or break your next loan application and your ability to borrow money. A good FICO score is the key to success. That said, if your credit has been in the firing line recently, you’ll have to do some repairs. The good news is there is still hope and you can easily impress a scrutinizing loan officer by implementing a few simple strategies discussed in this article.
How lenders grade your credit worthiness
There are other factors lenders look at when underwriting a loan. To track these factors, lenders use FICO scores to put everyone on a scale and quantify credit-worthiness. Doing this is useful in making quick decisions about a borrower’s:
- - loan balances
- - ability to pay
- - payment history
- - history of seeking credit
To repair your credit, here are some tricks and tips you can use to fix your FICO score.
Step 1: You need a plan
Planning to apply for a loan in advance of actually putting in your application can affect your outcome tremendously. If your credit score is poor, you can make changes to the good in 3 to 6 months. What is most unfortunate is how little attention people devote to planning.
A poor (or, less than stellar) credit rating can not only affect your approval status, but it can also affect the amount of interest you will pay. As such, planning before applying not only improves your chances for getting approved, but it also saves you money in the long run by lowering your borrowing costs.
Step 2: Decrease your loan balances
Put simply, if you are using all of your credit (or worse, exceeding it) you aren’t likely going to get approved for more debt.
As a general guideline, you should not exceed 75% of the credit limit on each account. Notice how I’ve said the credit limit for each account rather than all of your accounts combined. If you have a credit card with a $ 1,000 limit, pretend the limit is only $ 750 and stick to that limit. Apply the same formula to your other cards and their limits. This can impact your score noticeably, which helps you if you try to borrow money later. Use the next 3 – 6 months to bring down your limits to ideal levels.
Step 3: Be aware of your ability to pay
Aside from usage, there is another factor that relates to loan balances that can affect you. If you have too many accounts open and not enough income to pay them down, lenders might think you too risky to lend to.
If this is the case, there isn’t much you can do. You can pay off your balances, which is good for your FICO score to begin with, but it won’t get rid of excess credit, which will still affect debt ratios.
If you are tempted to close down some of your accounts that you don’t use, think again. Closing down accounts is not universally a good idea as it can negatively affect your credit. The best advice is to not open useless accounts (such as department stores or specialty cards you don’t need) and lower your balances. Working on other factors will improve your overall score.
Step 4: Shape up payment habits
If you’ve had late payments in the past, your score will take a hit as a result. That said, if you improve your payment history from today forward, the activity will be reported and you’ll boost your FICO score. Vow to make all of your payments on time – from this day forward!
Step 5: Don’t try to get credit
If you plan to apply for a loan in the next 3 – 6 months, do not seek any credit whatsoever between now and the time that you apply. Every time you try to get credit, you get a “hit” on your report. Hits lower your FICO score slightly. Though the impact is not huge, the impact from repeated incidents (and being subsequently rejected) does not look good to prospective lenders.
Put the above strategies into play and you will start to see dramatic improvements in your FICO score. To borrow money, lenders just want to make sure you are a good credit risk. They actually want to lend out as much money as they can. That is how they profit, after all. However, before profits, lenders have another priority and that is to protect their capital. If you do all your homework, and launch a plan in advance and put the strategies discussed in this article into play, you will come out ahead.
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