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Things You Can Do to Improve Your Credit

People need to borrow money for a number of reasons. Whether or large expenditure suddenly arises or you have planned to spend a large sum on going back to school or buying a house, you will likely need to borrow money. How do lenders determine whether you qualify for a loan? Lenders loan you money based on your credit score, a numerical calculation of the likelihood that you will repay the loan promptly according to your repayment history.

Your credit score is a number that falls somewhere between 300 and 900 points. The higher the number, the better your credit score. The model lenders normally use to determine your credit score is called FICO (Fair, Isaac and Company). The following percentages are used in this model for determining credit scores:

• 35 percent of your total credit score is based on credit history. Your credit history includes such information as how many bills you paid late, how many bills were handled by collection agencies, whether you have filed for bankruptcy, etc. More recent items on your credit history will affect your credit score more than issues from years ago.
  
  
• 30 percent of your credit score is based on outstanding debt. Outstanding debt includes amounts owed on car loans, home loans and credit cards. The more credit cards you have maxed out, the poorer your credit rating.
  
  
• 15 percent of your credit score is determined by how long you have had credit. The longer established credit you can claim, the better your credit score. Your credit history gives lenders a better prediction of your future ability to repay monies borrowed.
  
  
• 10 percent of your credit score comes from the number of inquiries in your report. The more credit cards or loans you apply for, the more inquiries you will have on your credit report. Lenders tend to read more inquiries as a potential problem with credit and repayment.
  
  
• 10 percent of your credit score is determined by the types of credit you currently have open (e.g., credit cards, car loans, mortgages, etc.).

Five Steps to Improve Your Credit Rating
Because your credit score is key to establishing yourself in the financial arena, making it as high as possible is important. If you find yourself with a mediocre to bad credit score, don't fret. With a bit of time, you can boost your FICO score. Here are some steps you can take to improve your credit rating: 

• Correct blatant mistakes: Review your credit reports from all major credit bureaus at least once per year and/or before you apply for a loan.
  
  
• Pay your bills on time: Paying your bills on time is always important, especially if you are applying for a loan. If you are late paying your bills or if you miss paying a bill, you will compromise your chance of securing a loan.
  
  
• Reduce your credit card balances: Your credit balance compared to your credit limit affects your credit rating. Try to keep the balances at or below 25 percent of your limit.
  
  
• Pay off debt rather than moving it around: Transferring your balance on one credit card to another increases your ratio and, therefore, will probably lower your credit score.

A Few More Tips to Improve Your Credit
Don’t close unused credit card accounts near loan time. If you do this, you will raise your balance-to-limit ratio. Also, if possible, don’t open any new credit cards when seeking a loan. Opening new accounts may actually lower your credit score if you have a limited credit history or few accounts.