Your Credit Score
What is on your credit report makes all the difference on your next loan application and your ability to borrow money. A good FICO score is the key to success. That said, if your credit has been in the firing line recently, you’ll have to do some repairs. The good news is that there is hope, and you can impress a loan officer by putting these strategies to good use.
How lenders grade your credit worthiness
There are other factors lenders look at when 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
- - payment habits
- - history of seeking credit
To repair your credit, follow the steps below and your FICO score will improve accordingly.
Step 1: Make a plan
Planning on applying for a loan before you do can affect the outcome. 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. As such, planning before applying not only improves your chances for getting approved, but it also saves you money in the long run by lowering your borrowing costs.
Step 2: Decrease your 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 rule of thumb, you should not go over 75% of the credit limit of any account. Notice, that’s credit limit for each individual account, not all accounts combined. If you have a credit card with a $ 1,000 limit, pretend that the limit is actually only $ 750 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 practice can impact your score dramatically, which will ultimately help you borrow money successfully. Use the next 3 – 6 months to bring down your limits to ideal levels.
Step 3: Know about your ability to pay
Aside from usage, there is another factor that relates to loan balances that can affect 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 could pay down your balances, which would be good for your FICO score anyway, but it won’t eliminate all the excess credit you have (which will still affect your 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 only advice I have here is to refrain from opening up useless accounts in the first place (like department stores or specialty cards that you really don’t need in the long run) and simply lower your balances. Working to improve other factors will help your score overall.
Step 4: Improve your payment habits
If you’ve had late payments in the past, your score will take a hit as a result. However, if you start to improve your payment history from this day forward, your improved activity will be reported and you will start to notice boosts in your FICO score. Vow to make all of your payments on time – from this day forward!
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 lower your FICO score slightly. 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.
Put the above strategies into play and you will start to see dramatic improvements in your FICO score. To borrow money, lenders just want to make sure you are a good credit risk. They actually want to lend out as much money as they can. That is how they profit, after all. That said, lenders have a priority before profits which is to protect 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.