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The Basics About Credit Scoring

Credit scoring can be confusing! Whether you have good or bad credit your credit is based on a three digit number called your FICO score. In theory a score of 720 or above is considered to be good enough to get a loan or a credit with good interest rate. However, today with the economy in the situation its in, lenders are setting higher standard for borrowers so you want to shoot for the highest possible score.

The question is how do you get a higher score? The first step is to pull your credit report. You care able to get 3 free reports a year by going to annualcreditreport.com. It is smart to spread the three reports out over the course of a year so you can essentially get a credit report every four months. Once you review your report you can then determine what is bringing your score down and from there work to improve it. Here four possible reason for your score to be low and some suggestions on how to increase your score:

  • A high debt to credit ratio: Understanding your debt to credit ratio can help you improve your credit score. Here is a simple way to think about what your debt to credit ratio is: Debt Used divided by Available Credit = Debt Load. The higher your debt load to the available credit you have, the lower your score will be. If you can keep your debt load under the 50% mark, the better off you will be. One fast way to bring your ratio down is to call your credit card company and ask them to increase your credit limit. If you have established yourself as a good customer then there is a good chance they will increase your credit limit for you. This will instantly change your debt to credit ratio and help increase your credit score.
  • Late payments: If your credit report reveals a low score as a result of late payments you need to change this right away. When it comes to credit cards it is not suggested to only make a minimum payment, but if it helps you pay on time then make the minimum payment. Late payments can really hit you hard and you need to avoid this at all costs. Start making your payments early or make it a point to make a payment every time you get paid.
  • Avoid Store Credit Cards: Retail store credit cards can be tempted especially when you find out you can get 15% off your total purchase. Store cads typically have high interest rates and the 15% off usually ends up not being a savings unless you pay your card off each and every month. If you can’t do this then just stay away from the cards all together. Plus, remember every time you have a credit inquiry for new credit it hurts your credit. If your trying to build your credit this could make it that much harder.
  • No Credit History: If you discover you have a low credit score because you don’t have a credit history that’s not really a bad thing. After all, its easier to build positive credit as opposed to having to repair bad credit. With that being said, consider getting a secured credit card. This is a great way to build credit, provided you make your payments on time. Be a good responsible cardmember and you will start building your credit