How Can I Improve My Credit Rating?
Your credit rating is arrived at through your credit report, which is a detailed history of your financial dealings. A number system is used with numbers ranked between 0 and 900. This number system is called a FICO scoring system. FICO stands for Fair Isaac & Co., the company who developed the first scoring systems in the 1950s. Banks use this system to decide which of their credit products you may be eligible for. Information for your credit report is collected by three credit referencing agencies: Experian, Equifax and Trans Union.
If your credit rating is less than 620 you may find it particularly difficult getting the type of credit you would like. If it is over 760, your interest rates should dramatically improve.
What Criteria Can Influence My Credit Rating?
Many things can have an impact on your credit rating. Often information is organized into two categories: 'white date' and 'black data'. 'White data' is information about your general financial habits, whether your accounts are in credit, whether you use an overdraft, your general income and outgoing of cash. 'Black data' records whether you have ever defaulted on payments, made late payments or declared bankruptcy; basically whether you are high-risk to a lender.
Other things that can have an influence on your credit rating are:
- How often you have applied for credit
- Past dealings with the company you are applying to
- What credit you currently have
- Your repayment habits
The Repayment Habit Catch
The last point can be a confusing one. You would think that if you always paid off your cards in full each month, you should have a high-flying credit rating. Actually, this can sometimes damage your credit rating because you are not making the bank any money because you never accrue any interest. Credit ratings asses both whether you are a risk, as well as whether you are profitable. Banks like customers who make the minimum monthly payment whilst remaining in debt. This can actually improve your credit rating.
Why Improve My Credit Rating?
The better your credit score, the better the credit products available to you. Some perks include better credit offers such as:
- Lower interest rates: those with a poor credit score are usually required to pay higher interest rates, and those with excellent credit are offered lower interest rates. See Low Interest Credit Cards
- Increased credit limit: the better your credit rating, the more you will be allowed to borrow whether it be a credit card loan or a home mortgage loan
- Cash back: Some credit cards offer cash back rewards of up to 5%. See Cash Back Credit Cards.
- Rewards such as travel, cruise and shopping points. See Rewards Credit Cards
- Reduced administration fees.
So, How Do I Start to Improve My Credit Score?
Your credit rating is compiled from the following information (ranked from most important criteria to the less important criteria with approximate percentages):
- Payment history: 35%
- Debt: 30%
- Length of credit history: 15%
- New accounts: 10%
- Types of credit: 10%
With this in mind, one of the best ways to boost your credit rating is to improve your recent payment history. Credit scoring is usually based on current financial habits. So current payment history takes precedence over past late payments etc. Making sure that you pay your bills on time will have a very beneficial effect on your immediate credit rating. Prompt payment is the single most important factor to address.
The next most important issue to address in order to raise your credit rating, is the amount of debt you carry. Paying off debt will make a big impact on your rating. Ideally paying off the debt gradually rather than in one fell swoop. You can also spread debt between cards. Your credit rating will improve if debt is less than 25% of your total credit allowance. If you need to borrow more than the 25% of total credit available, then it might be a good idea to increase your credit limit. Increase your credit limit only in order to help balance the percentage ratio, don't do it if you know you will then spend the extra credit.
Another way to improve your credit rating is to choose a credit card program and stick with it past the introductory 0% interest rate period. Banks are businesses. They will increase your credit rating if you are making them money by paying some interest each month on your credit card. So once the initial 0% interest rate is over keep the credit card program with a balance so that you pay some interest each month. Another key to this is to always make your payments on time. So if you want to improve your credit rating, it might be a good idea to kick the habit of moving credit between 0% credit card offers. If you can afford to do this, it can be a useful strategy.
Improving Your Credit Rating After Bankruptcy
In addition to the above mentioned advice, signing up for a secured credit card may be helpful in gaining a better credit score after bankruptcy. A secured credit card is a credit card that has been "secured" with a deposit. The debtor builds up a good credit history over time by paying the balance on time regularly each month. Most creditors will eventually offer the secured credit card holder unsecured credit card opportunities. Be sure that the secured credit card you apply for is regularly reporting to the credit agencies each month. See Secured Credit Cards.
Get a Copy of Your Credit Report
It is worth investing in a credit report from each of the three credit agencies: Experian, Equifax and Trans Union and checking for any errors. Millions of reports are processed every month and mistakes do happen. If they've got you confused with another Arthur Smith or mistakenly added an account or late payment, this can have a serious effect on your credit rating.