Your credit score has a huge impact on your loan application. It is a very important number lenders use to determine whether or not you’ll qualify for new credit, and at what interest rates and terms of credit. Those with the highest scores get the lowest interest rates.
Back in the good old days, 620 was considered a decent credit score but in the post crisis economy (and most lenders continue to tighten credit requirements), even a 720 credit score isn’t good enough to get the best loan terms. These days, lenders typically demand a FICO score of 740. (Please refer to the FICO Score Chart)
According to myFICO, a 100 point difference in your FICO score could mean over $25,000 extra in interest payments over the life of a 30 year mortgage on a $300,000 home loan.
What can you do if you are on the lower end of the credit score scale? And how can you raise it up to 740?
Well, there are a few things to can you do right now to raise your credit score by 100 points (or whatever number you have in mind). In fact, these are do it yourself credit repair tips that could easily save you a significant amount of money. Without further ado, let’s review the other possibilities.
#1 Check your score periodically for errors
Don’t assume that the information on your credit report is error free. That’s why it pays to review and make sure everything is up-to-date and accurate.
Here’s the good news. By law, you’re entitled to for free credit report from AnnualCreditReport.com once a year; keep in mind, though, that this free report only shows your credit history, not your credit score.
The following are possible errors which you can be fixed by way of dispute
- Accounts that aren’t yours due to possible cases of identify theft.
- Reports of late payments when you have already paid on time.
- Bankruptcies older than 10 years or accounts that are listed as still due.
- Other negative information that’s older than 7 years.
If you uncover any error, you can file dispute it by writing a letter to the bureau and requesting that the negative entries be removed. Though each credit reporting agency has its own rules regarding challenging the incorrect information. While it might seem like a daunting task, you’ll be glad you did.
Another tactic you can use to clean up your credit report is to dispute a negative item even if you believe it is accurate. Unethical? It works sometimes.
#2 Pay your bills on time
Your score is very sensitive to whether you pay your bills on time. One missed payment could lower your score significantly. In fact, missing just one payment can lower your credit score by as much as 100 points. So stay on top of your credit card, loan, and utility bill deadlines.
If possible, set up automatic payments that take an amount you specify every month from your checking account, making at least the minimum payments. Don’t blemish your credit report with late payment.
#3 Lower your debt-to-credit ratio
Try to keep a low debt-to-credit ratio – the ratio of your credit card balances to credit limits, meaning that if you own a credit card, your card balances should be only a small fraction of your available credit. For instance, if you have a limit of $1,000, your balance should stay well under $300.
Aim to keep your balance below 30% of your limit on each card or if you’re a customer with a good history, ask your current credit card issuers to raise your limits. Most will oblige.
Most lenders look at both your total debt-to-credit ratio as well as the debt-to-credit ratio of each credit card, the less you utilize your credit, the better. Do your best to maintain favorable ratios for both.
#4 Don’t apply for new credit unless necessary
Though new credit is the least important factor in your score, it is still an important issue to consider. Unless it is necessary, don’t open credit accounts you don’t intend to use as it will lower your credit score.
This is because it has been statistically proven that those acquiring more credit are a bigger lending risk than those who are not. Make sense?
Last but certainly worth a mention is that the length of your credit history accounts for 15 % of your score. Those with long, established credit histories fare much better than those who are just becoming financially established. Sure there is little you can do about this, except to maintain a solid track record of using borrowed money wisely by sticking to the above tips.
In summary, your credit score can either save you money or cost you money. Therefore, if you have a low credit score, it may be in your best interest to take proactive steps to raise your score to the higher scale (preferably above 740 mark), even if that means you put off applying for a loan.
Failing which could easily cost you hundreds or thousands of extra dollars paid for higher interest rates, especially when you go to apply for a large loan, like a mortgage. After all, when it comes to mortgages, auto loan and credit cards, the higher your score, the lower the interest rate you’re going to pay.
It is therefore upon you now to see to it that you maintain the only score that matters. It might not be easy and it won’t happen over night. It takes discipline, sacrifice and patience, but the results will be worthwhile.
You may seek advice from financial advisers on how to rescore it, but ultimately you play the biggest role by sticking to the advice and most importantly, taking action.