Your Credit Score
The contents of your credit report can make or break your next loan application and your ability to borrow money. A good FICO score is the key to success. However, if your credit has taken a beating in recent times, you will have to do a little dusting off. The good news is that there is hope, and you can impress a loan officer by putting these strategies to good use.
How lenders gauge your credit worthiness
There are various factors that lenders look at when it comes to underwriting a loan. To track these factors, lenders use FICO scores to put everyone on a scale and quantify credit-worthiness. Doing this is useful in making quick decisions about a borrower’s:
- loan balances
- ability to pay it back
- payment habits
- history of seeking credit
To repair your credit, here are some tricks and tips you can use to fix your FICO score.
Step 1: Make a plan
Planning to apply for a loan in advance of actually putting in your application can affect your outcome tremendously. If your credit score is poor, you can make changes to the good in 3 to 6 months. What is most unfortunate is how little attention people devote to planning.
A poor (or, less than stellar) credit rating can not only affect your approval status, but it can also affect the amount of interest you will pay. Planning before applying improves your chances of getting approved, and it saves you money with lowering borrowing costs.
Step 2: Pay down loan balances
Put simply, if you are using all of your credit (or worse, exceeding it) you aren’t likely going to get approved for more debt.
As a general guideline, you should not exceed 75% of the credit limit on each account. Notice how I’ve said the credit limit for each account rather than all of your accounts combined. If you have a credit card with a ,000 limit, pretend that the limit is actually only 0 and commit to sticking to this personally-imposed reduced limit. Apply the same formula to all of your other cards and their respective limits. This can impact your score noticeably, which helps you if you try to borrow money later. Use the next 3 – 6 months to bring down your limits to ideal levels.
Step 3: Know about your ability to pay
Beyond usage, another factor relating to loan balances will help you. If you have too many accounts open and not enough income to service those accounts, lenders might classify you as a risk that they’re not willing to take.
If this is the case, there isn’t much you can do. You can pay off your balances, which is good for your FICO score to begin with, but it won’t get rid of excess credit, which will still affect debt ratios.
If you are tempted to close down some of your accounts that you don’t use, think again. Closing down accounts is not universally a good idea as it can negatively affect your credit. The best advice is to not open useless accounts (such as department stores or specialty cards you don’t need) and lower your balances. Working to improve other factors will help your score overall.
Step 4: Improve your payment habits
If you have had many late payments in the past, your score is bound to be bruised as a result. That said, if you improve your payment history from today forward, the activity will be reported and you’ll boost your FICO score. Promise yourself to make all payments on time, from now on without fail!
Step 5: Don’t try to get credit
If you intend to apply for a loan in the next 3 to 6 months, don’t apply for any credit at all between now and when you apply. Every time you try to get credit, you get a “hit” on your report. Hits bring your FICO score down. While they don’t make huge impacts, having plenty of them (and, being subsequently rejected) is not a good situation for prospective lenders to discover when they pull your report.
Putting the above strategies to use and you’ll see improvements in your FICO score. Lenders want to make sure you aren’t a risk if you want to borrow money. They want to lend as much as they can. That is how they profit, after all. However, before profits, lenders have another priority and that is to protect their capital. If you do your homework, and have a plan in place and use some of the tips we’ve discussed, you can come out ahead.
