Category Archives: Loan Tips
How to Build a Healthy Credit Score
When choosing a loan, one of the first things we check on is the interest rates. Apparently, the lowest interest rates and the best deals are only offered to those with good to excellent credit. If you have plans on obtaining a personal loan, car loan or mortgage, check your credit first to see if youll qualify for the best rates. If you have a low credit score, its a good idea to work on improving your credit first before applying for a loan. How can you build up your credit score? Here are some tips:
Remove negative information. Negative information can dramatically pull down your overall credit score. If those negative remarks are old and have already been settled, ask the credit bureau who issued your report if these remarks can be removed. Also, check for errors or incorrect charges in your report. If you found errors, call your creditor involved to clarify the issue and send a letter of dispute to your credit bureau.
Do not maximize your credit limit. See to it that youre not using more than 50% of your credit limit on all your accounts. Experts recommend using only 30%-40% of your allotted credit to reduce the risk of accumulating debts and improve your credit score at the same time. Dont close old accounts. Be careful about cancelling credit cards especially if youve had those cards for a long time. If those cards have high rates and charges, you dont have to use them often. Use them once in awhile only for small purchases to keep them from automatically closing. After swiping the card, pay off your balance completely before your scheduled due date.
Submit payments on time. Its important to submit your payments on time not only to your credit cards but to all your creditors. Pay close attention to your payment dates. As much as possible, try to submit your payments ahead of your due date to avoid delays or missed payments. Not only will this habit help build up your credit score, you can also save money by not paying the extra interest rate and late penalty charges.
Avoid submitting multiple applications to different lending companies. If you want to apply for a new credit card, choose carefully and submit your application to only one credit card company. Dont try to apply for credit cards just to get the freebies they offer. Remember, too many inquiries on your credit report sends out a negative impression to other lenders and may pull down your credit score.
Call in advance if youre going to be late. If you know that you cant submit your payment on time for this month, call your lender or credit card company right away and explain your situation. If you do so, it is most likely that your creditor would extend your due date without reporting it as late payment. If you promised your creditor that you will be paying your balance by the next month, do your best to keep your promise.
What Goes into Your Credit Score?
Credit scores can be computed using different credit scoring systems but the most widely used system today is the FICO score. Its formula was created by the Fair Isaac Corporation and is the one used today by many lenders, banks, financial organizations and the major credit bureaus (Experian, Equifax, TransUnion.
The perfect FICO score is 850 and although achieving this number may seem unrealistic, getting a score ranging from 720 and above is already considered as good to excellent. However, a FICO score below 620 will put you in the category of a “high risk borrower”. Thus, it is recommended for everyone to be aware of the factors that make up their credit score.
Factors that Determine Your Credit Score Payment history. Your payment history comprises 35% of your total credit score. Here, how timely you are in submitting your payments, how long it takes you to pay your past due bills, how many times you were late or missed with your payments, and everything that has to do with your payment habits count.
Credit line usage. How you use your credit limit makes up the 30% of your credit score. The higher the usage of your credit limit, the lower your credit score is. Ideally, borrowers should not go beyond 30% of their available credit. If you own a low interest credit card, be careful not to maximize your credit line as this can damage your overall FICO score.
Length of credit history. 15% of your total FICO score is based on how long you have had credit. A longer record of credit history is of course more impressive especially if it shows timely payments all throughout. Be careful about closing your oldest accounts. Dont close your oldest credit cards just because they have high rates. The trick is to use them only for small purchases and pay off your balance in full always to avoid the interest rate.
New credit. Opening too many different accounts at once or in short period can pull down your credit score. Why is this? This gives a negative impression to lenders on why you need to apply for too many credit in that short span of time. Having too many inquiries made by the lenders whom you submit application to will also affect your credit score. If you are in the habit of sending credit card applications just to get the free shirt or the free cap upon signing up, stop now. Youre doing damage to your credit and thats not worth the freebie youre getting. Remember, new credit makes up 10% of your total credit score.
Types of credit used. The types of credit found in your credit report make up the other last 10% of your score. Having a variation of accounts in your credit report is definitely a good thing. For instance, aside from credit card accounts, having a mortgage, an auto loan and other credit in your account shows your capability in how you handle your obligations as a borrower.