There are many misconceptions about credit scores out there.
There are customers who believe that they don’t have a credit
score and many customers who think that their credit scores just
don’t really matter. These sorts of misconceptions can hurt
your chances at some jobs, at good interest rates, and even your
chances of getting some apartments.
The truth is, of you have a bank account and bills, then you have
a credit score, and your credit score matters more than you
might think. Your credit score may be called many things,
including a credit risk rating, a FICO score, a credit rating, a
FICO rating, or a credit risk score. All these terms refer to the
same thing: the three-digit number that lets lenders get an idea
of how likely you are to repay your bills.
Every time you apply for credit, apply for a job that requires you
to handle money, or even apply for some more exclusive types
of apartment living, your credit score is checked.
In fact, your credit score can be checked by anyone with a
legitimate business need to do so. Your credit score is based on
your past financial responsibilities and past payments and credit,
and it provides potential lenders with a quick snapshot of your
current financial state and past repayment habits.
In other words, your credit score lets lenders know quickly how
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much of a credit risk you are. Based on this credit score,
lenders decide whether to trust you financially - and give you
better rates when you apply for a loan. Apartment managers
can use your credit score to decide whether you can be trusted to
pay your rent on time. Employers can use your credit score to
decide whether you can be trusted in a high-responsibility job
that requires you to handle money.
The problem with credit scores is that there is quite a bit of
misinformation circulated about, especially through some less
than scrupulous companies who claim they can help you with
your credit report and credit score - for a cost, of course.
From advertisements and suspect claims, customers sometimes
come away with the idea that in order to boost their credit score,
they have to pay money to a company or leave credit repair in
the hands of so-called “experts.” Nothing could be further from
the truth. It is perfectly possible to pay down debts and boost
your credit on your own, with no expensive help whatsoever.
In fact, the following 101 tips can get you well on your way to
boosting your credit score and saving you money.
By the end of this ebook, you will be able to:
•Define a credit score, a credit report, and other key financial
terms
•Develop a personalized credit repair plan that addresses your
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unique financial situation
•Find the resources and people who can help you repair your
credit score
•Repair your credit effectively using the very techniques used by
credit repair experts
Plus, unlike many other books on the subject, this ebook will
show you how to deal with your everyday life while repairing
your credit. Your credit repair does not happen in a vacuum.
This book will teach you the powerful strategies you need to
build the financial habits that will help you to a keep a high
credit risk rating. It really is that simple.
Start reading and be prepared to start taking small but powerful
steps that can have a dramatic impact on your financial life!
The Basics
Before you start boosting your credit score, you need to know
the basics. You need to know what a credit score is, how it is
developed, and why it is important to you in your everyday life.
Lenders certainly know what sort of information they can get
from a credit score, but knowing this information yourself can
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help you better see how your everyday financial decisions
impact the financial picture lenders get of you through your
credit score. A few simple tips are all you need to know to
understand the basic principles:
Tip #1: Understand where credit scores come from.
If you are going to improve your credit score, then logic has it
that you must understand what your credit score is and how it
works. Without this information, you won’t be able to very
effectively improve your score because you won’t understand
how the things you do in daily life affect your score.
If you don’t understand how your credit score works, you will
also be at the mercy of any company that tries to tell you how
you can improve your score - on their terms and at their price.
In general, your credit score is a number that lets lenders know
how much of a credit risk you are. The credit score is a
number, usually between 300 and 850, that lets lenders know
how well you are paying off your debts and how much of a
credit risk you are.
In general, the higher your credit score, the better credit risk you
make and the more likely you are to be given credit at great
rates. Scores in the low 600s and below will often give you
trouble in finding credit, while scores of 720 and above will
generally give you the best interest rates out there. However,
credit scores are a lot like GPAs or SAT scores from college
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days - while they give others a quick snapshot of how you are
doing, they are interpreted by people in different ways. Some
lenders put more emphasis on credit scores than others.
Some lenders will work with you if you have credit scores in the
600s, while others offer their best rates only to those creditors
with very high scores indeed. Some lenders will look at your
entire credit report while others will accept or reject your loan
application based solely on your credit score.
The credit score is based on your credit report, which contains a
history of your past debts and repayments. Credit bureaus use
computers and mathematical calculations to arrive at a credit
score from the information contained in your credit report.
Each credit bureau uses different methods to do this (which is
why you will have different scores with different companies) but
most credit bureaus use the FICO system. FICO is an acronym
for the credit score calculating software offered by Fair Isaac
Corporation company. This is by far the most used software
since the Fair Isaac Corporation developed the credit score
model used by many in the financial industry and is still
considered one of the leaders in the field.
In fact, credit scores are sometimes called FICO scores or FICO
ratings, although it is important to understand that your score
may be tabulated using different software.
One other thing you may want to understand about the software
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and mathematics that goes into your credit score is the fact that
the math used by the software is based on research and
comparative mathematics. This is an important and simple
concept that can help you understand how to boost your credit
score. In simple terms, what this means is that your credit score
is in a way calculated on the same principles as your insurance
premiums.
Your insurance company likely asks you questions about your
health, your lifestyle choices (such as whether you are a smoker)
because these bits of information can tell the insurance company
how much of a risk you are and how likely you are to make
large claims later on. This is based on research.
Studies have shown, for example, that smokers tend to be more
prone to serious illnesses and so require more medical attention.
If you are a smoker, you may face higher insurance premiums
because of this.
Similarly, credit bureaus and lenders often look at general
patterns. Since people with too many debts tend not to have
great rates of repayment, your credit score may suffer if you
have too many debts, for example. Understanding this can help
you in two ways:
1) It will let you see that your credit score is not a personal
reflection of how “good” or “bad” you are with money. Rather,
it is a reflection of how well lenders and companies think you
will repay your bills - based on information gathered from
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studying other people.
2) It will let you see that if you want to improve your credit
score, you need to work on becoming the sort of debtor that
studies have shown tends to repay their bills. You do not have
to work hard to reinvent yourself financially and you do not
have to start making much more money. You just need to be a
reliable lender. This realization alone should help make credit
repair far less stressful!
Credit reports are put together by credit bureaus, which use
information from client companies. It works like this: credit
bureaus have clients - such as credit card companies and utility
companies, to name just two - who provide them with
information.
Once a file is begun on you (i.e. once you open a bank account
or have bills to pay) then information about you is stored on the
record. If you are late paying a bill, the clients call the credit
bureaus and note this. Any unpaid bills, overdue bills or other
problems with credit count as “dings” on your credit report and
affect your score.
Information such as what type of debt you have, how much debt
you have, how regularly you pay your bills on time, and your
credit accounts are all information that is used to calculate your
credit score.
Your age, sex, and income do not count towards your credit
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score. The actual formula used by credit bureaus to calculate
credit scores is a well-kept secret, but it is known that recent
account activity, debts, length of credit, unpaid accounts, and
types of credit are among the things that count the most in
tabulating credit scores from a credit report.
Tip #2: Keep the contact information for credit bureaus
handy.
The three major credit bureaus are important to contact if you
are going to be repairing your credit score. The major three
credit agencies can help you by sending you your credit report.
If you find an error on your credit report, these are also the
companies you must contact in order to correct the problem.
You can easily contact these organizations by mail, telephone,
or through the Internet:
Equifax Credit Information Services, Inc
Address: P.O. Box 740241
Atlanta, GA 30374
Telephone: 1_888_766_0008
Online: www.equifax.com
TransUnion LLC Consumer Disclosure Center
Address: P.O. Box 1000
Chester, PA 19022
Telephone: 1_800_888_4213
Online: www.tuc.com
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Experian National Consumer Assistance Center
Address: PO Box 2002
Allen, TX 75013
Telephone: 1_888_397_3742
Online: www.experian.com
You may want to note this information wherever most of your
financial information is kept so that you can easily contact the
bureaus whenever you need to. Your local yellow pages should
also have the contact information of these credit agencies as
well.
Tip #3: Develop an action plan for dealing with your credit
score.
Once you have your credit report and your credit score, you will
be able to tell where you stand and where many of your
problems lie. If you have a poor score, try to see in your credit
report what could be causing the problem:
-Do you have too much debt?
-Too many unpaid bills?
-Have you recently faced a major financial upset such as a bankruptcy?
-Have you simply not had credit long enough to establish good credit?
-Have you defaulted on a loan, failed to pay taxes, or recently been reported to a collection agency?
The problems that contribute to your credit problems should
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dictate how you decide to boost your credit score. As you read
through this ebook, highlight or jot down those tips that apply to
you and from them develop a checklist of things you can do that
would help your credit situation improve.
When you seek professional credit counseling or credit help,
counselors will generally work with you to help you develop a
personalized strategy that expressly addresses your credit
problems and financial history. Now, with this ebook, you can
develop a similar strategy on your own - in your own time and at
your own cost.
When developing your action plan, know where most of your
credit score is coming from:
1) Your credit history (accounts for more than a third of your
credit score in some cases). Whether or not you have been a
good credit risk in the past is considered the best indicator of
how you will react to debt in the future. For this reason, late
payment, loan defaults, unpaid taxes, bankruptcies, and other
unmet debt responsibilities will count against you the most.
You can’t do much about your financial past now, but starting to
pay your bills on time - starting today - can help boost your
credit score in the future.
2) Your current debts (accounts for approximately a third of
your credit score in some cases). If you have lots of current
debt, it may indicate that you are stretching yourself financially
thin and so will have trouble paying back debts in the future. If
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you have a lot of money owing right now - and especially if you
have borrowed a great deal recently - this fact will bring down
your credit score. You can boost your credit score by paying
down your debts as far as you can.
3) How long you have had credit (accounts for up to 15% of
your credit score in some cases). If you have not had credit
accounts for very long, you may not have enough of a history to
let lenders know whether you make a good credit risk. Not
having had credit for a long time can affect your credit score.
You can counter this by keeping your accounts open rather than
closing them off as you pay them off.
4) The types of credit you have (accounts for about one tenth
of your credit score, in most cases). Lenders like to see a mix
of financial responsibilities that you handle well. Having bills
that you pay as well as one or two types of loans can actually
improve your credit score. Having at least one credit card that
you manage well can also help your credit score.
As you can see, it is possible to only estimate how much a
specific area of your credit report affects your credit score.
Nevertheless, keeping these five areas in mind and making sure
that each is addressed in your personalized plan will go a long
way in making sure that your personalized credit repair plan is
comprehensive enough to boost your credit effectively.
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The Best Ways to Boost Your Credit Score
Because of the way credit scores are calculated, some actions
you take will affect your credit score better than others. In
general, paying your bills on time and meeting your financial
responsibilities will boost your score the most. Owing a
reasonable amount of money and being able to repay it will
show lenders that you take your finances seriously and pose
little threat of lost money. There are a few tips that, more than
any other, will boost your credit score the most:
Tip # 4: Pay your bills on time.
One of the best ways to improve your credit score is simply to
pay your bills on time. This is absurdly simple but it works
very well, because nothing shows lenders that you take debts
seriously as much as a history of paying promptly. Every
lender wants to be paid in full and on time.
If you pay all your bills on time then the odds are good that you
will make the payments on a new debt on time, too, and that is
certainly something every lender wants to see. Experts think that
up to 35% of your credit score is based on your paying of bills
on time, so this simple step is one of the easiest ways to boost
your credit score.
Paying your bills on time also ensures that you don’t get hit with
late fees and other financial penalties that make paying your
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bills off harder. Paying your bills in a timely way makes it easier
to keep making payments on time.
Of course, if you have had problems making your payments on
time in the past, your current credit score will reflect this. It
will take a number of months of repaying your bills on time to
improve your credit score again, but the effort will be well worth
it when your credit risk rating rebounds!
Tip #5: Avoid excessive credit.
If you have many lines of credit or several huge debts, you make
a worse credit risk because you are close to “overextending your
credit.” This simply means that you may be taking on more
credit than you can comfortably pay off. Even if you are
making payments regularly now on existing bills, lenders know
that you will have a harder time paying off your bills if your
debt load grows too much.
The higher your debts the greater your monthly debt payments
and so the higher the risk that you will eventually be able to
repay your debts. Plus, statistical studies have shown that those
with high debt loads have the hardest time financially when
faced with a crisis such as a divorce, unemployment, or sudden
illness.
Lenders (and credit bureaus who calculate your credit score)
know that the more debt you have the greater problems you will
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have in case you do run into a life crisis.
In order to have a great credit score, avoid taking out excessive
credit. You should stick to one or two credit cards and one or
two other major debts (car loan, mortgage) in order to have the
best credit rating. Do not apply for every new credit line or
credit card “just in case.” Borrow only when you need it and
make sure to make payments on your debts on time.
You should also know that taking out lots of new credit accounts
in a relatively short period of time will cause your credit score to
nosedive because it will look as though you are being financially
irresponsible.
Tip #6: Pay Down Your Debts
If you have a lot of debt, your credit score will suffer. Paying
down your debts to a minimum will help elevate your credit
score. For example, if you have a $1000 limit on your credit
card and you regularly carry a balance of $900, you will be a
less attractive credit risk to lenders than someone who has the
same credit card but carries a smaller balance of $100 or so. If
you are serious about improving your credit score, then start
with the largest debt you have and start paying it down so that
you are using a less large percentage of your credit total.
In general, try to make sure that you use no more than 50% of
your credit. That means that if your credit card has a limit of
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$5000, make sure that you pay it down to at least $2500 and
work at carrying no larger balance. If possible, reduce the debt
even more. If you can pay off your credit card in full each