Ten Tips to Improve Your Credit Score Instantly

Ten Tips to Improve Your Credit Score Instantly
Diana Young
Author – Financial Fitness Books for Beginners www.financialfitnessbooks.com

Want to boost your credit score but don't know where to begin? Follow these simple steps and begin improving your credit score today.

1. Know what credit is:
Credit, by definition means that you have purchased something without paying for it first. You have purchased an item with a credit card, a line of credit, a loan or a pay-later program such as no interest or payments for six months. Also, in the case of your monthly services such as cell phone, cable TV or hydro, these suppliers are in effect extending credit to you. For example, you sign up for a phone, and at the end of the month, you pay for what you have already used. This means you are using their service on credit, in advance of payment.

2. Understand how Credit Scores are tabulated
Your credit score (also known as a credit rating) is the grown-up version of a school report card. From the moment you make your first purchase on credit, or open your first service account such as cable TV, cell phone or hydro, you begin to create what is known as your credit history, which is the basis for your credit score.
In a nutshell, your credit activity is reported by the company you have obtained the credit from to a Credit Bureau. Whenever you take out a loan, the financial institution reports it to the Credit Bureau. When you make your payments, they report it. Likewise, if you do not make a payment, if you are late with a payment or fail to pay off the loan as agreed, this is also reported. With utilities, such as cable TV, heat, hydro, or telephone, these companies will report if you make a late payment or fail to make a payment.

3. Know your score and what a good score is:
There are two major Credit Bureaus – Transunion and Equifax. It is critically important that you know your credit score with both of these companies. It is recommended that you obtain your credit score every year from each of these Credit Bureaus. (It is suggested that you alter when you get this once you begin the regular process of checking your scores each month. In other words order your Transunion in December each year and your Equifax in July each year). You can obtain your credit score instantly online with each company by at Transunion.com or Equifax.com (For Canadians go to Transunion.ca or Equifax.ca).

At the time of printing a credit score and history from one of the Credit Bureaus– which shows current credit and past history – is less than $20.00. When you first do this, get both reports and record your credit score. When you check your own credit history it does not affect your score. Although it may not seem fair, whenever someone else checks your credit rating this impacts negatively on your score. For this reason, it is always better to use a mortgage broker to obtain a mortgage as they only register as one hit to your credit score. If you go to multiple banks and credit unions and they each check your score it appears that you are “desperate” for credit and this impacts you negatively. This is also true for other loans. The best bet is to have a copy of your current credit score available to a potential lender. They may be able to decide what your loan or mortgage rate will be without checking and then you can comparison shop without impacting your credit score. Once you decide on a lender, however, they will have to do their own credit score check – but it may save them from doing it in the inquiry stage.

Credit scores are rated from 300 – 900 depending on the Credit Bureau. There is no magical number that is considered good because different services require different scores. For instance, a premium credit card would require a higher score than a basic credit card. However, as a general rule, 650 is considered acceptable (like a C in school), 750 is considered very good (like an A in school) and a number that you should be striving to attain. Anything below 650 is a red flag and needs immediate improvement and anything over 750 is considered golden.

The most important thing to do when you get your credit score is to look through the history with a fine tooth comb. Mistakes can be made, and if there are any you need to contact the lender and have them corrected. This simple review of your credit history and score could instantly improve your credit rating.

4. Understand why a good credit score is so important:
Your credit score is critically important to your financial fitness. If you have a poor score, this limits your ability to access credit, including a mortgage. It also greatly affects the interest rate you will be charged on credit, which could add thousands of dollars of interest payments over your lifetime.

Your credit score may be accessed by a financial institution, credit card company, department store, business or landlord to name a few that have a legitimate reason to request it. This means any time you apply for credit from them, they have the right to request your credit score to evaluate what type of credit risk you are. What many people are not aware of it that a poor credit score could also cost you the new job you are hoping to get, or the apartment you are trying to rent, or the insurance coverage that you may need.

If you have a low score, this reflects badly on you and makes you a high credit risk. Lenders and other institutions use your score as a measurement to determine your creditworthiness. When a landlord has a choice of tenants, she will choose the one with a better credit score, as that person is seen to be more reliable. An employer may make the same judgment call.

5. Learn how a credit score is computed.
Your credit score is determined from a combination of the following:
-your payment history
-amounts owed
-length of credit history
-new credit applied for
-type of credit used

6. Understand the behavioural factor that can influence your credit score.
Pay your bills on time! If you habitually pay bills late, or just whenever you can afford to, you will be ruining your credit score.

It cannot be stressed enough how important paying your bills (or even a portion of them) by the date due is. Because many people are not aware of how significant their credit score is to their financial fitness, they tend to be far too casual when they bill their monthly bills. Every time you make a late payment – even just by one day – this lateness is reported to the credit bureau, thereby negatively affecting your score.

If you have to make a choice, it is far better to pay even a portion of your bill on time, than being late and paying it all when you can afford it. Avoid letting payment sloppiness cost you your good credit score!

Paying off debts also increases your credit score. This shows that you have used credit and fulfilled your responsibility by paying off your debt as agreed. Ensure when you check your credit rating that if you have paid off a loan that it is recorded. If it isn’t contact the lender and have them add it to your report.

7. Use credit cards wisely
Limit yourself to one or two credit cards and keep them for a long time, as the length of time you have had a credit card impacts your score positively. Even if you have paid off a card and no longer want to use it actively, you can keep it and just use it from time to time (and instantly pay it off) so that you are demonstrating excellent use of credit. (See the Bonus Tip at the end for an example of how you could use these cards responsibly and for your benefit). Length of time holding a credit card is very important in determining your credit score. Don’t underestimate the power of this one habit.

8. Do not exceed 50 percent of your available credit on a credit card.
Always strive to maintain your credit balance on any given credit card to less than 50 percent of your limit. In other words if your credit line is $1,000 and you have $600 charged on the card, your credit balance is at 60 percent and that exceeds 50 percent of the credit line. This greatly influences your score. You get a gold star, so to speak, if you maintain a balance on your credit card of 50 per cent or less of the available credit. If you consistently carry balances that exceed 50 percent, especially on multiple cards, that triggers a negative effect. Also, if you have a credit card and have it paid off, or don’t carry a monthly balance, this is a positive factor for your credit score.

9. Do not sign up for a credit card just to earn a bonus, an instant discount or to get promotional items.
Be very careful to avoid the temptation to apply for and open new credit card accounts. These are often available at that time of purchase in major department stores. There are also promotional credit cards that are offered at airport or sporting events, where if you sign up you get free miles, you get a free hat, etc. Often these credit cards carry a high interest rate – so your free hat or discount for shopping with the card is not a deal at all! By adding another credit card to your stash, this impacts your score negatively and also tempts you to spend more on credit. Resist this marketing ploy!

10. Accept responsibility and take action
One of the best ways to improve your credit score and peace of mind is to be a person of integrity. When you take out a loan, or buy something on credit, make it your personal credo to guarantee that you will pay it back in full. Make it a habit to pay your debts on time. You have made a commitment and your integrity depends on following through.

You may get into a situation from time to time where you are short of money, or you are unable to fulfill your commitment. That does not mean this is a permanent situation. You need to be proactive and assure your creditor that you do intend to pay what you committed to (or for the services you have used). Explain that you are unable to make full payment at this time. By addressing the issue up front, you are taking responsibility and reassuring your creditor that you do intend to honour your agreement.

In many cases, your supplier or your creditor will appreciate your forthrightness, and honesty, and you can mutually agree on a repayment plan.
The one thing that will take you into financial despair faster than anything else is hiding from your inability to pay your own debts. Face up to where you stand, and set up a plan to pay back whatever you owe.

Bonus Tips:

11. Automate all your monthly payments and credit card bills
To avoid any late charges set up your bills to auto-payment online. In other words, set up automatic payments for your cell phone, hydro bill, and cable bill. your credit cards and any other loans or payments you have to make. The standard payments are the easiest, such as hydro and rent as these remain the same monthly (be sure to set up your hydro bills for monthly payments that are the same over 10 – 12 months of the year). For the bills that fluctuate such as cable and cell phone, figure out the average monthly amount over the past four months and set up a payment for this amount. For your credit cards set up at least the minimum monthly payment. This way you know you will not be late and you can also pay the difference if need be. This also prevents you from spending money that you owe to someone else.

12. Turbo charge improving your credit score.
When you set up your monthly bills to be automatically paid, set them up to be paid by one or more credit cards. If you have 2 or 3 credit cards, use them all for this purpose. Then set up pre-payment of the credit card for the day afterwards. In other words, pay your hydro bill by credit card online automatically and then automatically schedule to pay your credit card for this exact amount the day after. This shows activity on your credit card – both using it for credit and paying it off. This payment would be addition to your automated minimum payment, so at the very least your credit card is being paid twice a month. In this way you get points for paying your bills on time and you get points for paying your credit card. A double bonus for improving your credit score.

For more details and more ideas to improve your credit score – be sure to pick up your copy of “Financial Fitness for Beginners” – Your 12-week training program. www.financialfitnessbooks.com

When I hear somebody sigh “Life is hard,” I am always tempted to ask “Compared to what?” - Sydney J. Harris

June 1, 2012 – Diana E. Young