How to Understand and Improve Your Credit Score

29 September 2009



Your credit score is one of the most important factors used to decide whether you will qualify for a major loan and what its terms will be. Every day, many would-be borrowers are denied loans, while consumers with strong credit histories are getting great rates on mortgages, car loans and student loans. Understanding how your credit score is formulated is your first step when applying for a loan.

Take advantage of the rules.
Did you know that too many credit applications can lower your score? Multiple inquiries signal that you are having trouble successfully securing a loan and may be a credit risk or undesirable borrower. However, multiple inquiries from the same type of lender, such as a mortgage company, are counted as a single inquiry if submitted over a short period of time.

Reduce your debt.
Creditors look for an optimal total debt load of 36 percent of your household income. If your monthly mortgage, car loan and revolving credit card payments total more than 36 percent of your monthly salary, you will likely need to find a way to lower your overall debt before applying for a new loan.

Pay on time.
The easiest way to raise an ailing credit score is to make all your loan payments on time every month. Over the span of several months, you will likely see your credit score improve. When making credit card payments, you should set up automatic payments and always pay more than the minimum payment due. This will prevent you from incurring large amounts of interest and will make you a more desirable borrower.

Timing is everything
Wait 12 months following a credit problem before applying for a mortgage or a car loan. You will be penalized less for problems that are more than a year old.

Get your finances in order.
Avoid credit card purchases prior to applying for a major loan and stay away from independent finance companies with high interest rates, which reflect poor credit management. Transferring debt from one cad to another is another way to reduce your credit score. Of course, paying off credit cards every month is ideal, but if that is not possible, steadily pay down the debt.

Plan ahead
Don't open new credit card accounts right before applying for a home or car loan. Having too much available credit can lower your score. Also, the longer you have been at your current job, the better this reflects on your qualifications. If you plan on applying for a loan and will be switching jobs soon, apply before you start your new job.

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