June 19, 2014
Fast Ways To Improve Credit Scores That Last Forever
The first step to boosting your credit score to comprehend its basis of calculation. Major credit bureaus utilize a complex math formula called “FICO” to derive three-digit figures that literally dictate your financial fate as main determinant of lender approval and interest rates.
Biggest score impactors
FICO algorithms analyze basic credit file characteristics. In order of relative impact, these factors include: 1) Payment history; 2) Debt ratio; 3) Account age; 4) Account type(s) and, 5) Recent creditor inquiries.
Payment history holds primary sway with a whopping 35 percent say in your final credit score. However, correction of its prior direction in a wrong turn is a long-term process requiring several years of prompt high-interest debt repayment. Thus, a far cheaper and much faster strategy is a starting focus on the second most significant factor.
Best credit score improvement = debt ratio reduction
Known variously as “credit utilization ratio,” debt ratio denotes balance owed in proportion to total available credit. The lower this ratio, the higher is your overall credit score. Fixing a high debt ratio requires self-discipline for strict adherence to the regimen outlined below:
Minimize vs. mobilize debt
Many people try to disguise a high debt load by consolidating several small balances into one or two big loans. FICO is not so easy to fool, however, because it assumes some usage of all available credit. Accelerate repayment to eliminate or negotiate to reduce debt for optimal results.
Inside secret of success
A little-known fact is that debt ratio fluctuates wildly within a single month. Such extreme volatility stems from wide variations in the way credit card issuers report account balances. Many banks report outstanding credit card balances as of the statement date rather than the due date. Therefore, even if you pay the full balance each month, your credit file will reflect an outstanding balance. As this is naturally bad news for your credit score, take your business elsewhere if current card issuer(s) report statement-date balances.
Right debt types make credit scores rise
Roughly, 10 percent of your credit score reflects the relative diversity of debts in your composite file. Computerized FICO algorithms categorize accounts into four recognized types: 1) Installment; 2) Revolving; 3) Consumer finance, and 4) Mortgage. The more blend in current bills, the more likely creditors will lend you money. Your warm reception stems from highly favorable perceptions of financial responsibility from having a positive history of handling many different credit types.
Fine credit gets blessed by Father Time
Average account age accounts for about 15 percent of your credit score. Although time never goes forward any faster than a watch, you can “borrow” a bit of credit history from family or friends. For instance, suppose your parents have made monthly mortgage payments to the local bank like clockwork for the last few decades. If so, have a long talk to ask Mom and Dad for a helping hand by adding your name to the loan contract.
Once they happily agree and the bank has processed all necessary paperwork, a brand new “old” account appears like magic in your credit file. Just be sure to do some quick math before you ask to verify that you were not a baby or toddler wearing diapers when Mom and Dad took out the loan! Such a gross oversight just might raise eyebrows among prospective lenders and backfire with far worse results than instant rejection. Fraud indicator checkmarks in credit reports and computer database blacklisting entry are merely the beginning of a lifelong nightmare!
Go slow to build great credit
Contrary to popular belief, quality has more positive impact on credit history than mere quantity. Thus, you fare much better by faithfully repaying two accounts on time for 2 years than creating six new bills with different creditors for 6 months. Such attempted cheating is self-defeating because it lowers the average age of all accounts, thus bringing down your overall credit score. Moreover, even if you repay the entire balance on half a dozen credit cards every month, prospective lenders view too many open accounts as “overextended” and deny your application due to excessive obligations.
Bombard lenders fast for fresh credit
When the time is ripe to take on new credit, proceed with caution but all deliberate speed. Credit scores lose a few points each time a would-be lender looks at your file. Moreover, a sudden blitz of inquiries in a brief span of time can haunt for up to 2 years by leaving behind shadows of doubt in lenders’ minds about financial stability.
Fortunately, however, human mathematicians who designed FICO are neither heartless nor naïve. Instead, they readily perceived that consumer finance transactions typically evolve over days or weeks of applying to multiple creditors in a single market or industry sector.
Besides chronological time, FICO considers account type and creditor industry. This means it is best to apply for specific kinds of credit from as few potential sources as possible as fast as you can. An effective strategy to win the race for the best interest rate is to pull your own credit scores and contact lenders to prequalify before you stop by to apply. Besides saving wasted time, this prevents dropping your scores by five points for the “privilege” of credit denial.
Begin practicing PRN borrowing
For the vast majority of viewers who have very little medical education, “PRN” is a Latin abbreviation with a loose English translation, “take as needed.” Like doctors who prescribe pain medication, prudent consumers must take a PRN approach to credit management. This means taking on no more new credit than necessary to fill legitimate needs at lowest cost.
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