Thank you for all of the positive feedback on last week’s financial tips post! All who responded said they wanted to know more information, so here it goes!
If you have a less-than-stellar credit score, don’t fret. There are five ways to give your credit score the boost you need!
#1– Pay the MINIMUM due on time each month– Notice I said minimum. You don’t need to pay the balance off every month to get a good score. Don’t get me wrong– if you have extra money to send, go ahead and pay more than the minimum. The thing lenders, landlords, and businesses focus on when sizing you up as a borrower is whether you will be diligent about paying your bills on time, not necessarily that you pay the balance every month. By paying your bills on time, you are proving that you are a good credit risk. Your ability to pay the minimum on time makes up 35 percent of your FICO credit score.
#2– Reduce your debt-to-credit ratio– Another 30 percent of your score is determined by how much outstanding debt you have relative to the total available credit limit on all of your cards. Part of this also includes other debts such as mortgages and auto loans and how much you have left to pay on those, compared to the original loan amount). The lower your debt-to-credit ratio, the better. And there’s plenty you can do with your credit cards to improve that ratio. Let’s say you have two cards. One has a balance of $5,000 and a limit of $10,000, and the other card has a balance of $2,000 and a limit of $8,000. That means you have a total credit debt of $7,000 and a total credit limit of $18,000, which works out to a ratio of 38 percent. Now let’s say you manage to cut your balances in half, so you now have a debt balance of $3,500 and the same credit limit of $18,000. Your new ratio will be 19 percent.
The FICO brain says there’s no specific number that qualifies as a “good ratio”, just that lower is better.
Another tactic to lowering your ratio is to boost your credit limit. But please be very careful before you call your credit card issuer and ask for a higher limit. Only do this if you have the willpower not to use that extra money.
#3– Save your credit history– About 15% of your credit score comes down to your credit history. The more history you have, the more evidence FICO has to size up your credit habits. Therefore, it is a big mistake to cancel a card you no longer use, and especially if there is still a balance remaining. When you cancel the card, you wipe out all of that history. Think of it this way: if you were trying to size up two people to entrust with your money, would you lean towards the person you’ve known for ages, or someone you’ve just met? That’s the way lenders think. Besides, when you cancel a card, you lose the credit limit it carries, a move that hurts your debt-to-credit ratio we just discussed.
If you’re concerned you won’t be able to leave an unused card unused, then just tuck it away some place safe or take the scissors to it.
#4– Avoid offers for new cards- Just say “no” to the cashier offering you 10% off your purchase if you sign up for a store credit card. While that will only save you a few dollars at the time, you might be too tempted to rack up that new card very quickly. Too many cards make lenders nervous, and your card count is responsible for 10 percent of your FICO score. The theory is that if you open up a bunch of new card accounts, you are an accident waiting to happen: you have way too many opportunities to ring up big balances you won’t be able to pay.
#5– Get the right mix– While you don’t need 10 cards, lenders nevertheless also like to see that you can handle multiple credit lines simultaneously. An example of what they could consider a responsible array of personal debt would be a credit card or two, one department store card, and an “installment” loan such as student loan debt or a car loan. The idea here is to show them you are responsible enough to juggle a few different types of debt. It’s a bit ironic, but the one thing that makes lenders cautious is if you have no cards or loans; they then have no way of gauging whether you will be a good customer. So your mix of credit cards and loans constitute the final 10 percent of your credit score.
*Parts of this post were taken from Suze Orman’s “Women & Money”.
Disclaimer: I do not claim to be a credit repair company.