How To Improve Credit Score

How To Improve Credit Score

There was an idiom once that said "money makes the world go round" and it might have been true then, but that was before credit. These days credit is what makes the world go round from Wall Street to Main Street.

And how to improve credit score is a question asked by so mant today, the critical thing to do is educate yourself about credit. Knowledge is power, and understanding can help you to begin to improve your financial well-being. First, you must understand credit terminology. Next you need to know what the numbers mean and how they apply to you.

Your credit score is a number, (also called a FICO score) that tells lenders what sort of risk they will take should they choose to lend you money. This score is based on your credit history, which is built over time as you incur and reduce debt. Credit score and credit history mean different things but are partners in your credit report.

These numbers are so important
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because as your credit score decreases, the interest rate you will likely pay will increase, meaning you pay more for the money you borrow.

Your credit score tells lenders about you and how you have used credit. Your score is determined by several factors:

35% of your FICO score is your payment history. This tells lenders if you paid on time or missed payments. Making late payments or missing payments will lower your credit score more readily than anything else.

30 % is the amount owed on all your credit accounts. This tells lenders the amount that is owed in relation to the amount of credit you have available.

15% of you score is based on the length of your credit history. The oldest account you have will establish the beginning of your credit history, but the average of all your credit accounts is considered.

10% is new credit. Having opened a large number of new credit accounts in an attempt to build credit with a better history will have a negative effect on your credit report.

10% of the FICO score is based on the types of credit you have. A mix of credit is considered favorable. Mortgage, credit cards, bank loans, and retail accounts is a common blend.

So, how will knowing this help you to improve your overall credit score? Well, now that you know that 35% of your score is weighted on payment history, you will likely pay on time, EVERY TIME. It will obviously take a few months to create a more positive payment history, but starting today is very important as your most recent history has greater impact. The next key factor in your score is the amount owed in relation to the amount of credit you presently have available. Paying down your balances is the fastest way to improve your credit score. Using no more than 50 per cent of your available credit is a good rule of thumb, but if you have already passed that up, paying it down as much as possible will definitely help.

One thing NOT to do is to cancel all your credit cards. This will lower your debt ratio, or your amount owed versus your credit available. If you must close some of your credit accounts, close the newest first as they have the shortest history. Finally, if you have several credit cards, rotate them responsibly rather than leaving some dormant. Better to use each sparingly than to max out some.

Improving your credit score may seem daunting, but now that you understand where to start and why, you can begin your journey to a better credit score.

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