Monday, September 1, 2008

How to improve your credit score

Your credit score is an important measure of how well you manage your fiances. This is important to a lender because they expect you to make good on your promise to payback the money you borrow, with interest in a timely manner. It should be very important to you as well, because the higher your credit score, lower the risk to a lender, which translates into better loan terms for you. The first step would be to establish a line of credit, such as getting a credit card or shopping around for a car loan instead of paying cash. Once you do this, make all your payments on time. Being late with your payments lowers your credit score, and not paying at all would be detrimental to your credit score. Don't forget that improving your credit score takes time and effort, so don't be discouraged when you don't see immediate results. With determination, combined with discipline and sticking to your budget, you will be able to improve your credit score.

Here are some tips to help you maintain a good credit score.

1) Be sure to sign up for a free credit report at Annual Credit Report that allows you to get a free credit report once per year. Ability to monitor your credit score would help you discipline yourself by checking your progress periodically. Since there are 3 major credit reporting agencies, you will be able to get a free credit report every 4 months by requesting one from each of these companies once per year.
Don't confuse Annual Credit Report with the Free Credit Report, which is free for a trial period and then becomes a paid service after the trial period is over.
2) If you have been financially responsible living within your means and never borrowed money, you are still considered a higher credit risk. This is because you don't have a credit history and lenders don't know how good you are with paying back borrowed money on time. If you feel uncomfortable about borrowing money and still would like to pay cash, you could get a loan and pay it off with your first payment. Just make sure that there are no prepayment penalties when you apply for a loan. This way, you will establish good credit, and still maintain your life style and peace of mind of being debt free and financially responsible.

3) Don't apply for too many credit cards. To lenders, this is a signal that you are not responsible with money. Close accounts that charge you too much interest so you want to be tempted to tap the credit line.

4) Pay your bills on time. Being late on your bills is a perceived signal that you are unable to keep pace with your finances. You may have forgotten to write a check, but the damage is already done, and your credit score is affected. If you are the type that forgets to make payments, I would suggest automating your payments as much as possible. For instance, if you have a car loan, its easy to set up an automatic payment with your bank. Just make sure that you allow enough time for the automated payment to be delivered without being late as most banks require a certain amount of time to make the payment.

5) If you have had late payments due to legitimate reasons, make sure you contact the credit reporting agencies and add a note to explain why the payment was delayed.

6) If you have too many payments and it is becoming difficult to make payments, try to consolidate your debt, so you can have a single affordable payment instead of several unmanageable payments. Try your best not to get into a similar situation again by getting into the habit of using those credit lines again, at least until you have paid off your debt.

7) If you become unable to make the payments on time due to unexpected expenses, be sure to contact the creditors and let them know that this is temporary and try to work out an alternative payment plan to allow you to catch up without affecting your credit.

8) If you bought something that promises you no interest for a certain period of time, make a plan to pay it off at least a month before the first payment is due. Most of these offers would charge you all the interest for the past terms if you go beyond the due date of the 1st payment.

9) As you build and maintain your credit score, you will be tempted with offers of lower interest rates for periods of 6 months to a year or more. Make good use of these opportunities by moving your higher interest debt to lower interest offers, keeping in mind that you have this for a limited period of time as mentioned in item 8. Always be mindful of when your interest will change, and have a plan in place to be able to pay it off before that event. Don't count on getting another offer to a lower interest rate because your hopes may not materialize. Focus on what is within your control, not on what you expect.

10) Read up my other article titled Living Frugally and become a frugal spender. The government wants you to spend your hard earned money, going into extraordinary lengths to make you spend your money, and so do businesses. Basically, everybody wants your money! Its up to you to control your temptations, and keep a tight fist.

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