Most people think they know the “simple” facts about credit, yet they don't understand why they keep getting denied for loans. They believe that the road to a high credit score is a long self-depriving one that takes years to travel. However, what most people believe regarding credit are “simply” urban legends.
Since creditors report to the TRW agencies every 30 days, making a few changes this month in the way you handle your credit can strengthen your score quickly, legally, and easily. Below, you will find the most common Credit Urban Legends, the Truth behind those legends, and a Quick Fix to raise your score now. Implement the five following tips and you may find your score shooting up faster then you thought.
35% of Your Score is Based on Payment History:
(Making payments within 30 days of their Due Date)
Urban Legend: Paying late hurts your credit.
The Truth: Creditors only report you as late when you do not pay within 30 days of your due date. If you pay within 30 days, you don't get reported and your score does not get dinged. While paying late will definitely incur a late charge from your creditor, paying within 30 days will help raise your score with the TRW companies. So, be aware of your due dates, and be sure to pay at least the minimum before those 30 days are up.
Quick Fix: Catch up all your minimum payments. Then, call your creditors and ask them not to report you as late. Request that they make a note in your file so that if you dispute any late payment reports, someone else in the company won't interfere.
30% of Your Score is Based on Debt Ratio:
(The percentage owed versus the amount of available credit)
Urban Legend: The largest part of a Credit Score is based upon how much money you owe compared to your income.
The Truth: Income is not a factor in the credit scoring system. Instead, TRWs look at how much money a consumer owes divided by the amount of available credit. The magic number these days is 35% (or $35 owed for every $100 you can spend). Owing less then 35% of the credit available can help raise your score while owing more then 50% can lower it.
Quick Fix: While most people would assume the fastest way to lower your debt ratio would be to go down (paying down your balance, to be exact), you should consider going up instead. More specifically, consider asking to have your credit balances raised, a quick fix that can help reduce your debt ratio without digging into your own pocket. It will incur a credit inquiry, which can bring your score temporarily down a few points, but it will also lower your debt ratio bringing your score up.
15% of Your Score is Based on Length of Credit History:
(The amount of time you've had a credit account)
Urban Legend: When you are not using a credit card, you should close the account. Having open accounts can only hurt your credit.
The Truth: You should never close your credit accounts, if possible. Once you close a credit account, that account is put on the fast track off your TRWs. Depending on the TRW Company, that account will be removed in six to eight years whether good or bad. Without open credit accounts, creditors do not know how you pay your bills. Your payment history is the best way of knowing if you are a viable credit risk. Plus, these accounts also report to the credit companies, and they report in your favor even if you do not use them.
Quick Fix: Use old accounts once a year to keep them open. Buy something small and pay it off in full. This will keep the creditor from closing your account, and will ensure that they are more willing to raise your available credit when asked, or give you an excellent balance transfer offer if needed.
10% of Your Score is Based on New Credit:
(Credit inquiries and new credit accounts)
Urban Legend: Having a high credit score guarantees that Creditors will open accounts for you.
The Truth: Creditors will turn down excellent credit as well as bad credit if a consumer has too many inquiries or new accounts on their TRWs.
Every time a consumer applies for credit, an inquiry is placed on the consumer's report. This inquiry can temporarily lower your credit score as much as 5 points per inquiry. In addition, new creditors will assume that too many new accounts or too many inquiries mean that you are about to jump into a heap of debt. As a result, that consumer is no longer a feasible risk.
Quick Fix: After you have your limits raised, don't apply for any credit for a few months. Credit inquiries often take as much as two years to drop off a credit report, but most creditors will base approvals on inquiries made within the last six to twelve months. That means, every month you wait, inquiries are dropping off of your TRW and your score is going up, plus you look more attractive when applying for credit you really want. Try to apply for new credit only when necessary, and try not to apply for credit for at least three months when planning a large purchase.
10% of Your Score is Based on Types of Credit Used:
(Credit cards, home loans, lines of credit, student loans, and auto loans)
Urban Legend: Having too much credit will hurt your score.
The Truth: Creditors want to see that you can handle their credit account as well as the ones that you already have. On-time payments to cars, houses, and credit cards make you appear credit-savvy and responsible.
Quick Fix: If you don't own one already, consider buying a house, condo or mobile home. A home loan will not only increase your net worth, but it gives you buying power later on. Creditors LOVE homeowners, and home loans for owner-occupied homes are fairly easy to get. Afterall, it's a secured loan that a bank can cash in on should you fail to pay. By having a home, you can bring your credit score up quite a bit quickly and it gives you power like no other credit account will do.
These tips are quick fixes to strengthening your score now and work best when your score is in the average to excellent range. If your score has been affected by collection agencies and late payments, you can have them removed by simply disputing them on your credit report. It's just as easy to do.
